Ethiopia
This case study on Ethiopia was carried out by Ermias Biadgleng, Legal Expert at UNCTAD’s Intellectual Property Unit, Arie de Groot, Consultant, PharmAccess Foundation, and Onno Schellekens, Managing Director, PharmAccess Foundation. Inputs for the study were collected during a field mission to Ethiopia from 15 to 19 November 2009. The case study report was finalized under the supervision of Kiyoshi Adachi, Chief of the Intellectual Property Unit, under the overall responsibility of Mr James Zhan, Director of the Division on Investment and Enterprise, and Mrs Nazha Benabbes Taarji, Officer-in-Charge, Investment Capacity-Building Branch.
Abbreviations 137 1. Background and methodology 138 2. Description of the firm, structure and product 139 3. Technological capacity of SEAA 141 4. The pharmaceutical market in Ethiopia 144 5. The framework for local production and technology transfer 147
5.1 National drug policy and regulations 147
5.2 Intellectual property and technology transfer 149
5.3 Industrial and investment policy 151
5.4 Science, technology and innovation policy 155
5.5 Education 156
5.6 Good governance 157
6. Analysis of SEAA 158 7. Implications of local production and related technology transfer
on access to medicines 159 8. Policy-relevant findings 160 References 162 Annex: Interviewed individuals and institutions 165
Contents
Abbreviations
AAU Addis Ababa University APF Addis Pharmaceutical Factory
COMESA Common Market for Eastern and Southern Africa CPEL Cadila Pharmaceuticals (Ethiopia) Ltd
DACA Drug Administration and Control Authority EHNRI Ethiopian Health and Nutrition Research Institute
FMHACA Food, Medicine and Health Care Administration and Control Authority
DBE Development Bank of Ethiopia
ecbp Engineering Capacity Building Programme EHGC empty hard gelatin capsule
EPHARM Ethiopian Pharmaceutical manufacturing S.C.
EPMSMA Ethiopian Pharmaceuticals and Medical Supplies Manufacturers Association
GIZ Deutsche Gesellschaft für Technische Zusammenarbeit (German Society for Technical Cooperation)
GTP Growth and Transformation Plan IV intravenous fluid
LIDE List of Drugs for Ethiopia
PFSA Pharmaceutical Fund and Supply Agency
SEAA Sino-Ethiop (Africa) Associates Private Limited Company TFILU Technology Faculty–Industry Linkage Unit
1. Background and methodology
This case study was designed to examine pharmaceutical production in a least developed country (LDC), namely Ethiopia. Specifically, this case study examines how a small enterprise in an LDC managed to build a strong technological base for one important input needed in pharmaceutical production, the relevance of South–South investment and joint ventures as a vehicle for technology transfer, and the role of North–South technical assistance to support technology transfer to a private-sector initiative in pharmaceutical production in an LDC.
UNCTAD thanks Sino-Ethiop Associate (Africa) Private Limited Company (SEAA) for agreeing to be the subject firm for this case study, and the Engineering Capacity Building Programme (ECBP) and Deutsche Gesellschaft für Internationale Zusammenarbeit (German International Cooperation; GIZ) Ethiopia for assisting UNCTAD for facilitating the arrangement of interviews during the field mission.
The study uses a case study research methodology that consists of collection of data through reviews of relevant regulations and public policy documents and academic literature, and through open-ended, face-to-face interviews in Ethiopia. Interviewees were identified through purposive sampling.
During the fact-finding mission to Ethiopia, from 15 to 19 November 2009, the team interviewed representatives and officials of three pharmaceutical companies, one hospital, five government agencies (including two banks and the secretariat of one development programme) and the Ethiopian Pharmaceuticals and Medical Supplies Manufacturers Association (EPMSMA).1 The interviews with SEAA and two other companies involved the entire senior management of the respective companies and visits of their factories.
In addition, a semi-structured questionnaire designed to capture the dynamics of firm-level activities related to production and technology transfer was administered to the firms, the results of which are included in the case study where relevant.2
This case study defines innovation as any new products, processes and organizational changes that are new to the enterprise, context and country in question, although not necessarily to the world at large (UNCTAD, 2007).
In keeping with the scope of the project, technology transfer is defined as all components of technology, both codified (in terms of blueprints, hardware, machine parts and plant technologies) and tacit (know-how and skills), that are essential to enhance the capacity of the organizations in the recipient country to produce pharmaceutical products.3
1 See Annex: Interviewed individuals and institutions.
2 See Annex: Field questionnaire.
3 A uniform definition of technology transfer was used for all components of the project, including the trends survey, the regional dialogues and the stakeholder analysis.
2. Description of the firm, structure and product
SEAA is a joint venture established in 2001 by an Ethiopian company and two Chinese companies. The Ethiopian company, Zaf Pharmaceuticals Private Limited Company (PLC), holds a 30% share in the joint venture.
The two Chinese companies, Dandong JINWAN (Group) Co. Ltd. and China Associates (Group) Co. Ltd., each hold a 35% share of the company.4 The Chinese partners are producers of pharmaceuticals, gelatin, medical devices, packaging materials, empty hard gelatin capsules (EHGCs), and equipment and machinery for pharmaceutical manufacturing. They also engage in pharmaceutical investment and international marketing.5 The Ethiopian partner is engaged in import and distribution of pharmaceutical products in Ethiopia. The management board of SEAA consists of representatives of each of the shareholders. The initial capital of the joint venture was 71.4 million birr (approximately US$ 5.2 million at the time of writing) (SEAA, 2009). The joint venture became operational in 2003. The Ethiopian shareholder had been the importer and distributor of the products of the Chinese partners in Ethiopia. The Ethiopian Investment Agency provided services to the investors to facilitate the establishment of the joint venture. In this context, it arranged for the Oromiya Regional Government of Ethiopia to make available the land for the facility at a very low rent with flexible terms.
SEAA’s Executive Manager, Ms Zaf Gebretsadik, is also the owner of the Ethiopian partner company. With the exception of the chief engineer, the senior management and the 135 line staff of SEAA are entirely local (Walta Information Centre, 2009).
SEAA is exclusively involved in the manufacturing and marketing of EHGCs, which are considered an excipient. Pharmaceutical substances need to be formulated into specific dosage forms for regular use. EHGCs are used for controlled delivery of drugs routed through the digestive system (Segemann, 2002). Pharmaceutical producers fill EHGCs with powders, granules or pellets containing the drug formulated in a separate process.6 Drugs contained in hard gelatin capsules provide the advantages of faster formulation, predictable administration, protection of the formulation from light, and increased consumer comfort due to the fact that the capsules render the formulations tasteless and odorless.7
SEAA’s current capacity is 1.2 billion EHGCs per annum (SEAA, 2009). SEAA is currently running at full capacity, operating four fully automatic hard capsule production lines. It is currently producing EHGCs in standard industry-recognized sizes of 0, 1 and 2, in various colours. It supplies 70% of the EHGCs produced to Ethiopian pharmaceutical companies and exports the rest, mainly
4 Interview with Zaf G/Tsadik and senior management of SEAA, 17 November 2009.
5 See http://www.jinwan.com/eindex1.htm.
6 For oils and for active ingredients that are dissolved or suspended in oil, pharmaceutical companies use soft-gel capsules.
7 Segemann, 3.
to other African countries and, to a lesser extent, the Middle East. The companies that purchase the SEAA product in Ethiopia include Addis Pharmaceutical Factory (APF), Ethiopian Pharmaceuticals Manufacturing Factory (EPHARM), East African Pharmaceuticals PLC (EAP) and Cadila Pharmaceuticals (Ethiopia) Ltd (CPEL). APF is the largest consumer of SEAA products.
In Africa, 18 companies from the Democratic Republic of the Congo, Kenya, Tanzania, Zambia, Zimbabwe and South Africa purchase SEAA’s product. The Executive Manager of SEAA considers as one of its biggest successes the fact that SEAA has started supplying bigger companies in South Africa, which is one of the most advanced pharmaceutical producer countries in sub-Saharan Africa. SEAA also supplies two companies in Yemen.
Already operating at full capacity, SEAA is facing difficulty in meeting the increasing demand for EHGCs, especially in Africa. For example, its senior management indicated that SEAA would not match the projected demands received from APF for 2011 without an expansion of its current production capacity. SEAA is also not able to respond to orders from companies in Nigeria due to the high volume of orders and the difficulty of finding insulated thermal containers especially designed to transport products such as EHGCs at competitive rates from shipping lines in the region. This is not surprising, as the total African market for EHGCs is estimated to exceed 30 billion EHGCs per year. In the absence of good-quality EHGCs produced at a reasonable cost in Africa, Africa is mainly supplied by producers from China, India and South Korea.8
Both the Chinese and Ethiopian partners are involved in the marketing of EHGCs. The Chinese partners provide the main support for the marketing of SEAA products internationally, while the local partner addresses the supply to the domestic market.
SEAA is not tied to its shareholders with respect to sourcing of raw materials and the distribution of its product. Germany has emerged as its main supplier of raw materials, although the Chinese partners also supply raw materials.
Sourcing decisions are made based on price, quality expectations of customers and other business considerations, according to SEAA’s senior management.
It is important to understand the business rationale with which the joint venture partners embarked on the production of EHGCs in Ethiopia. It is very difficult to compete on a cost basis alone with the large EHGC factories in China and India. EHGCs come in high volumes but weigh very little. However, the cost of transporting EHGCs over large distances is relatively high, since the volume (i.e. not weight) of the shipment is the main basis for calculating the air or shipping fare using insulated thermal containers. In addition, transportation over long distances puts the quality and safety of the product at risk. EHGCs are relatively sensitive products and can become brittle due to moisture loss during transportation. Location can therefore reduce quality failure during supply. In this regard, SEAA management considers the state-owned local
8 The global demand is well over 240 billion capsule per year (in-Pharma, 2005).
carrier, Ethiopian Airlines, as providing important services for international transportation of its products within the region.
Location provides the further advantage to cater for specific demands from local pharmaceutical companies, allowing short lead times for supply that would have been lost processing import and foreign currency authorization, transportation and handling of the EHGCs over a long distance. It also allows the provision of services such as emergency supply in peak times, easier return of unused supply, deferred payments and other arrangements. With respect to export markets, quality and standards are competitive advantages.
The partners believe, therefore, that they could successfully compete with bulk producers of EHGCs by producing in Ethiopia and serving the country and neighbouring regions, given that demand continues to outstrip supply for EHGCs in Ethiopia and the rest of Africa. However, in the long term, the management recognizes the need to scale up production capacity to improve price competitiveness.
In 2009, the company registered a slight profit. SEAA’s management estimates that the company’s profitability will become sustainable with some cost-saving measures under implementation in relation to energy costs arising from the technology used for air handling, and when a planned expansion is realized.
SEAA initiated an expansion project to double its production capacity in 2010.9 According to interviews with SEAA management, the reasons for the expansion are due to the increased demand for its products since its international good manufacturing practice (GMP) certification. The management first applied for a loan from the International Finance Corporation (IFC). The application for the IFC loan was not successful. Instead, the Development Bank of Ethiopia (DBE) agreed to finance the project. SEAA expects to complete the expansion project and double its output by the second quarter of 2011.
3. Technological capacity of SEAA
The EHGC production technology consists of the gelatin (the ingredient technology)-capsule-making machinery and equipment; a GMP-compliant facility; process, specifications and related know-how for each stage of production; and application of colorant and labelling on the final product. The Chinese partners supplied all of the physical machinery and equipment, and most of the technology and expertise for the production of the EHGCs.
The technology between SEAA and the Chinese partners was supplied through arm’s length purchases.10 During the establishment of SEAA, the founders had the option to contribute in cash or in kind (including technology and know-how) under the Ethiopian investment law. As the valuation of technology contributed in kind would have to be determined by customs officials, however, the Chinese partners decided instead to transfer their investment in United States dollars to SEAA, and arranged for SEAA to purchase in United
9 Interview with Zaf Gebretsadik and senior management of SEAA, 17 November 2009.
10 Interview with Zaf Gebretsadik and senior management of SEAA, 17 November 2009.
States dollars the machinery, equipment and know-how from the businesses of the Chinese partners.
During the start-up phase, at any given time there were 6–12 Chinese engineers working at SEAA, first building the facility and installing the machinery and then, when production started in 2003, training the local staff in handling, operating and mastering the technology and know-how.11 The joint venture partners consider that there has been full and complete technology transfer of the relevant EHGC technology and that the local staff have mastered the technology.
Finally, the efforts of SEAA to secure international accreditation led to further investment in upgrading the facility. SEAA obtained international GMP certification in accordance with the Pharmaceutical Inspection Convention and Pharmaceutical Inspection Co-operation Scheme (PIC/S) in 2009. To achieve this, experts were brought in from Germany to inspect and advise SEAA on how to upgrade its standards (ecbp, 2009).12 The GMP PIC/S certificate will help to drive exports, particularly within Africa. It will also help pharmaceutical companies that use SEAA’s hard gelatin capsules to secure accreditation of their own products.
The process for GMP certification in accordance with PIC/S took over a year and is one of the key reasons for the company to invest in upgrading its technological capacity and skills for high-quality production. Based on the inspections in 2008, SEAA invested in upgrading its facility and manufacturing practice at a cost of approximately 2.5 million birr (around US$ 200 000). SEAA received certification of PIC/S conformity after the inspection in January 2009 for the manufacturing of EHGCs at its facility. ECBP provided support for SEAA during the inspection and certification process for PIC/S. SEAA became the first Ethiopian company to finalize the process and achieve GMP in accordance with PIC/S. Box 1 explains the importance of GMP certification to manufacturers of drugs in developing countries.
The staff demonstrated the changes during a factory visit that was part of the fact-finding mission. The changes include new laboratory equipment, upgrading of the quality-control system, the introduction of new procedures for handling of raw materials, specifications for each process of production, air control, water treatment and packaging. During the process for GMP certification, the staff also developed standards for each production process through in-house research and development (R&D), for example on the temperature and viscosity of the gelatin before it is released from the feed tanker.
11 Ibid.
12 The Engineering Capacity Building Program (ecbp) is a facility designed by the Ethiopian and German governments to assist the standard and technological upgrading of manufacturing enterprises, including in the pharmaceutical sector. The priority in the pharmaceutical sector is to assist selected local companies in complying with GMP in accordance with PIC/S.
SEAA was under inspection for local GMP by Ethiopia’s Food, Medicine and Health Care Administration and Control (FMHACA) of the Federal Ministry of Health during the fact-finding mission on 15 November 2009. SEAA has to keep its certification from FMHACA updated in order to import raw materials and export its products. The first certificate of current good manufacturing practices (cGMP) was confirmed by FMHACA in January 2003, acknowledging the satisfaction and compliance of the SEAA plant with the cGMP requirements.
The company has been frequently inspected for cGMP and received feedback in July 2007 and November 2009.
At present, SEAA does not undertake R&D to engineer new products. Its R&D focuses on production processes and the design of EHGCs to meet the demands of each customer, especially by applying trademarks, colours and other identification to the EHGCs. SEAA estimates that 5% of its expenditure goes on R&D, excluding amounts spent on quality control and product stability testing.13