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# **Making Medicines in Africa**

# **The Political Economy of Industrializing for Local Health**

Edited by

Maureen Mackintosh  *Professor of Economics, The Open University, United Kingdom*

 Geoffrey Banda  *Research Fellow in Regenerative Medicine, University of Edinburgh, United Kingdom*

 Paula Tibandebage  *Senior Research Associate, REPOA, Tanzania*

 Watu Wamae  *Visiting Research Fellow, The Open University, United Kingdom*

 Except where otherwise noted, this work is licensed under a Creative Commons Attribution 4.0 Unported License. To view a copy of this license, visit https://creativecommons.org/version4

 Editorial matter, selection and introduction © Maureen Mackintosh, Geoffrey Banda, Paula Tibandebage and Watu Wamae, 2016 Individual chapters © their respective authors, 2016 Softcover reprint of the hardcover 1st edition 2016 978-1-137-54646-3

 The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988.

Open access:

 First published 2016 by PALGRAVE MACMILLAN

 Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS.

 Palgrave Macmillan in the US is a division of Nature American, Inc., 75 Varick Street, New York, NY 10010.

 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world.

 Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries.

 DOI: 10.1007/978-1-137-54647-0 E-PDF ISBN: 978-1-137-54647-0 Paperback ISBN: 978-1-137-57133-5

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A catalogue record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data

 Making medicines in Africa: the political economy of industrializing for local health / [edited by] Maureen Mackintosh, Geoffrey Banda, Paula Tibandebage, Watu Wamae.

p. ; cm.—(International political economy series)

Includes bibliographical references.

 ISBN 978–1–137–57133–5 I. Mackintosh, Maureen, editor. II. Banda, Geoffrey, 1969– , editor. III. Tibandebage, Paula, editor. IV. Wamae, Watu, editor. V. Series: International political economy series (Palgrave Macmillan (Firm))

 [DNLM: 1. Technology, Pharmaceutical – economics – Africa. 2. Technology, Pharmaceutical – methods – Africa. 3. Diffusion of Innovation – Africa. 4. Drug Industry – standards – Africa. 5. Economic Development – Africa. 6. Pharmaceutical Preparations – supply & distribution – Africa. QV 778]

RA401.A55<PHONE_NUMBER>096—dc23<PHONE_NUMBER>

# Contents

# List of Figures

# List of Tables

#### x *List of Tables*

# **OPEN**

# Preface

This book is a collective project. It was designed and debated in a workshop funded largely by the United Nations Industrial Development Organization (UNIDO), in London in December 2014. We are grateful to UNIDO and to Juergen Reinhardt in particular for his support and encouragement. We also would like to thank the Open University and the Economic and Social Research Council, UK, for providing the funding that allowed this book to be published in open access form.

The book draws extensively on original research and on direct experience of involvement in policy making. Several chapters – and some of the broader framing of the book – have their origins in a research project on *Industrial Productivity and Health Sector Performance,* funded by the DFID/ESRC Growth Research Programme. The findings, interpretations, conclusions and opinions expressed in the relevant chapters (identified in notes) are those of the authors and do not necessarily reflect the views or policies of DFID or the UK ESRC. The views expressed throughout are the sole responsibility of the authors.

When a number of contributors to this book began to work on the *Industrial Productivity* project in 2012, it is fair to say that the international policy debates on access to medicines in African countries remained focussed on funding procurement of essential medicines from Asian manufacturers. The project aimed to explore the scope for local developmental synergy between industrial development of pharmaceutical production on the Sub-Saharan African subcontinent and improvement of the performance of health sectors suffering from chronic undersupply of essential medicines. As we have worked on the project, we have become part of a much wider movement to identify and generate these synergies. This book is an outcome of this networking, and we hope it will contribute to strengthening evidence, debate and policy making.

We have many people to thank. First, our extraordinary authors who have given their time and expertise to preparing the chapters and participating in the workshop debates. They have brought expertise in pharmaceutical research, manufacturing and policy making, as well as social science research. Among our African contributors, the editors would particularly like to thank Skhumbuzo Ngozwana and Tsige Gebre-Mariam for their commitment and for bringing in other expert colleagues also. We are also grateful to Alastair West of UNIDO for contributing his breadth of knowledge of this policy field, and to our Indian and Brazilian colleagues whose depth of historical understanding of interactions between industrial change and health sector values helped to shape the book's themes and objectives.

Much more widely, we owe a great deal to all the many manufacturers, distributors, health facility staff, pharmacy and drug shop staff, policy makers, regulators, researchers and others who have patiently answered the questions of authors of these chapters and participated in workshop discussions of the findings.

At Palgrave Macmillan, we thank our supportive publisher, Christina Brian; also Judith Allan, and our enthusiastic series editor Tim Shaw. Many thanks also to Radha Ray, who administered the London workshop with such welcoming efficiency, and to Jim McGinlay who has patiently chased endless manuscript detail.

We hope this book can make a real contribution to the search for better access to essential medicines alongside industrial development in Sub-Saharan Africa.

Except where otherwise noted, this work is licensed under a Creative Commons Attribution 4.0 Unported License. To view a copy of this license, visit https://creativecommons.org/version4

# Notes on Contributors

# **Editors**

**Geoffrey Banda** is a research fellow at the Innogen Institute within Science, Technology and Innovation Studies at the University of Edinburgh. He is currently working on an ESRC-funded regenerative medicine project looking at business models, value chains and innovation ecosystems for organizations involved in commercializing cell therapies. His doctoral and post-doctoral work at the Open University focussed on finance, innovation and development in the African pharmaceutical sector. He has previously worked in quality assurance in the food manufacturing and airline catering industries, focusing on microbial food safety, and has also been a corporate banker financing diverse industrial sectors.

**Maureen Mackintosh** is Professor of Economics at the Open University. She is a development economist specializing in the analysis of markets in health care and medicines, with particular reference to African contexts. She has just completed, with a number of collaborators including Paula Tibandebage, Samuel Wangwe, Watu Wamae and Norman Clark, a DFID/ESRC-funded project on Industrial Productivity and Health Sector Performance, the results of which inform a number of chapters in this book. Other recent collaborative research has focussed on the role of non-governmental public action in access to medicines, and on payments for maternal health care.

**Paula Tibandebage** is a senior research associate with REPOA, a nongovernment policy research institute in Tanzania. She has over 20 years research experience, specializing in issues of social protection and social services provisioning including health and education. Her most recent publication is entitled 'Can managers empower nurse-midwives to improve maternal health care? A comparison of two resource-poor hospitals in Tanzania', *International Journal of Health Planning and Management* 2015; it reports findings from her Wellcome Trust-supported project on ethics, payments and maternal survival in Tanzania.

**Watu Wamae** holds a PhD in the economics of innovation and development and is a visiting research fellow in the Department of Economics, Faculty of Social Sciences at the Open University, Milton Keynes, UK. Her research expertise is in the area of industrialization and innovation policy, and she works closely with governments in Africa. She has strong interests in structural change and dynamics of growth in African economies and has held a number of honorary assignments including the Human Resource Development and Science and Technology Indicators programme in Africa.

# **Contributors**

**Erika Aragão** is an associate professor at the Universidade Federal da Bahia (UFBA), Federal University of Bahia, Brazil. She is also a researcher at the Programme in Economics Technology and Innovation in Health Sciences (PECS/ISC/UFBA) and researcher at the National Institute for Neglected Diseases (INCT IDN – CDTS/FIOCRUZ). She has researched and published in the areas of technological innovation and health economics.

**Joanna Chataway** is Director of the Innovation, Health and Science Group at RAND Europe, a not-for-profit policy research institute, and Professor of Biotechnology and Development at the Open University. She has held senior positions and appointments across a range of academic, policy research, consulting and research funding bodies. She has particular expertise in the field of health innovation and has researched extensively the range of factors that influence the rate and direction of product and process innovation in health.

**Sudip Chaudhuri** is Professor of Economics at the Indian Institute of Management, Calcutta. His research interest includes matters relating to patents, the pharmaceutical industry as well as industrial and innovation policy. He has undertaken several studies for the United Nations Industrial Development Organization, Vienna and United Nations Development Programme, New York on the subject of promoting local production of pharmaceuticals in Africa.

**Norman Clark** is Emeritus Professor at the Open University where formerly he held a research chair in Innovation Systems and Development. He is a development economist whose research career has focussed mainly on academic and consultancy work dealing with science and technology policy issues in Africa and south Asia. In recent years he has acted as senior adviser to the DFID 'research into use' programme with special focus on technology development in East Africa.

**Gavin Cochrane** is an analyst at RAND Europe. His research interests are primarily focussed on innovation, global health and international development. At RAND he has worked on a variety of national and international projects, including a number of studies and evaluations examining the contextual factors involved with research, drug development and health systems strengthening in sub-Saharan Africa. He holds a BA in Economics and Japanese from the University of Leeds and an MSc in Asian Studies from Lund University, Sweden.

**Tiffany Ellison** is a doctoral candidate in the Department of Chemistry at Howard University in Washington, DC. She works under the supervision of Dr Joseph M. Fortunak. Her research interests include creating novel synthetic routes for HIV protease inhibitor drugs. Her goals are to make the drugs more affordable for people in low- to middle-income countries.

**Martins Emeje** holds a Bachelor's in Pharmacy with distinction from Ahmadu Bello University, Zaria, and a master of Pharmacy and PhD from University of Nigeria, Nsukka. He established an interdisciplinary group on nanotechnology at the National Institute for Pharmaceutical Research and Development (NIPRD). Prof. Martins' several international fellowships include the prestigious Raman fellowship. He has published over 100 primary scientific articles and patents. Prof. Martins who currently doubles as the Head in the Department of Pharmaceutical Technology and Raw Materials Development, Advanced Biology and Chemistry and NIPRD's Drug Manufacturing Unit, also holds the position of visiting professor at the University of Uyo. He coordinates Intellectual Property Rights matters and research collaborations at NIPRD.

**Joseph Fortunak** is Professor of Chemistry and Pharmaceutical Sciences at Howard University. He holds a PhD in Chemistry and did postdoctoral research at Cambridge University (UK). Dr Fortunak worked for many years in global pharmaceutical companies, most recently as Head of Global Chemical Development at Abbott Labs. He launched over a dozen new drugs, including major medicines for HIV/AIDS. Dr Fortunak now works with NGOs including UNITAID and the Clinton Foundation to promote access to medicines. He helped set up the Industrial Pharmacy Advanced Training (IPAT) with Sister Zita Ekeocha at the Kilimanjaro School of Pharmacy, where professionals are trained in medicines manufacturing and regulation to international standards of quality assurance.

**Solomon Gebre-Amanuel** is Research and Development Manager of the Ethiopian Pharmaceuticals Manufacturing Share Company. He has been in the Ethiopian pharmaceuticals manufacturing sector for the last 17 years. He has dedicated his career to the production and development of generic pharmaceutical products. He received his B. Pharm. (1997) and MSc (2005) in Pharmaceutics from Addis Ababa University.

**Tsige Gebre-Mariam** is Professor of Pharmaceutics at Addis Ababa University (AAU) and General Manager of the Regional Bioequivalence Centre. He also works as an independent consultant in the pharmaceutical sector including supply chain management and industry development. He has published extensively on conventional and modified drug release formulations, phytomedicines and alternative excipients, among others. He is co-author of *National Strategy for Pharmaceutical Manufacturing Development in Ethiopia* (2015) and a recipient of numerous awards and fellowships.

**Jane Mary Guimarães** is an associate professor at the Universidade Federal do Sul da Bahia (UFSB) – Federal University of Southern Bahia, Brazil. She is also a researcher at the Programme in Economics, Technology and Innovation in Health Sciences (PECS/ISC/UFBA) at the Federal University of Bahia, and a researcher at the Instituto Nacional de Ciência e Tecnologia em Saúde (CITECS) – National Institute of Science and Health Technology in Salvador, Bahia. She has researched and published in the areas of technological innovation and communication in health.

**Caroline Israel** is a researcher at UONGOZI Institute also known as Institute of African Leadership for Sustainable Development. Formerly she has worked as an assistant researcher in the Department of Social Protection at REPOA, Dar es Salaam, doing research on various social and economic policy issues including health and education. Currently her main areas of research are leadership, governance and sustainable development.

**Dinar Kale** is Senior Lecturer in Innovation and International Development at the Open University, UK. He has researched and published extensively in the areas of technological innovation, knowledge transfer and international development. His work concerns the issues that help or hinder innovation and development of the health care industries from developing countries.

**Mercy Karimi Njeru** is a senior research scientist and head of the Health Systems Research Unit at the Centre for Public Health Research in the Kenya Medical Research Institute (KEMRI). She holds a PhD and her work has recently received global recognition as one the best resources in mixed methods applications in health research. She has been involved in various research projects mainly from a health systems perspective and has also been involved in mentoring and supervising graduate students. She has participated in research involving countries in sub-Saharan Africa as well as Europe and has published in peer-reviewed international scientific journals.

**Joan Kariuki Kungu** is a research fellow at the African Centre for Technology studies. She has over eight years experience in multi-disciplinary research on environment, natural resources and sustainable development. She holds an MA in Development Studies with specialty in Environment for Development from the University of Nairobi, and a BSc in Environmental Science from Kenyatta University. She has particular interest in policy research for sustainable management of natural resources. She coordinated the Kenyan team's research on industrial productivity and health sector performance.

**Sebastião Loureiro** is a physician and holds a PhD in Epidemiology from the University of Texas Health Sciences Center. He is Emeritus Professor at the Universidade Federal da Bahia (UFBA), Brazil, and Executive Coordinator of the National Institute of Science and Health Technology. Recently his research has focussed on access to medical technology and health inequalities. He has contributed to the academic and institutional development of the fields of health economics and health technology at the Institute of Collective Health, University of Bahia, and is an active member of the Board of Directors of the Brazilian Association of Collective Health (ABRASCO) and Brazilian Association of Health Economics (ABrES).

**Catriona Manville** is a senior analyst at RAND Europe where she works in innovation and technology policy. She works on and manages research, policy analysis and evaluation studies across the sectors of health and higher education for clients in a variety of sectors including public–private partnerships, public health, the pharmaceutical industry and higher education institutions. In particular she has been involved in studies evaluating programmes and interventions in sub-Saharan Africa. She holds a PhD in Biochemistry from Newcastle University.

**Julius Mugwagwa** is a research fellow in the Development Policy and Practice (DPP) group and the INNOGEN Institute at the Open University, UK. He received undergraduate and postgraduate training in biological sciences, biotechnology and business administration in Zimbabwe before a PhD in Science, Technology and Innovation Studies at the Open University. Julius has worked in veterinary research, pharmaceutical production and quality assurance, medicines control, agricultural biotechnology research and biotechnology/biosafety governance. He is a recipient of Leverhulme Early Career Fellowship (2009–11) and the UK Economic and Social Research Council (ESRC) Future Research Leaders Scheme fellowship (2013–15).

**Phares G.M.Mujinja** holds a PhD in Public Health Economics from Heidelberg University and is Associate Professor of Health Economics and Public Health at Muhimbili University of Health and Allied Sciences, Dar es Salaam, Tanzania. His research interests are in health systems, health financing, health planning, monitoring and evaluation, pharmaceutical economics, and strategic project management. He has served as a consultant to various national and international organizations including the World Bank, EU, WHO, UNAIDS, UNDP, UNICEF, UNTAID. He has wide experience of designing and conducting healthrelated research; recent publications include pharmaceutical economics and consumer rights in health care.

**Margareth Ndomondo-Sigonda** has served as Chief Pharmacist (1998), Registrar of Pharmacy Board (1998–2003) and Director General of the Tanzania Food and Drugs Authority (2003–10). She then joined the African Union, New Partnership for Africa's Development (NEPAD) Agency, as their Pharmaceutical Coordinator (2010–to date) responsible for coordination of the African Medicines Regulatory Harmonization initiative. She holds an MSc in pharmaceutical services management (University of Bradford), an MBA from the Eastern and Southern Africa Management Institute-Tanzania/Maastricht School of Management-Netherlands; and Bachelor's in Pharmacy from the University of Dar es Salaam, Tanzania. Publications include: *The African Medicines Regulatory Harmonization Initiative: Rationale and Benefits*, *Clinical Pharmacology & Therapeutics* (2011).

**Skhumbuzo Ngozwana** is an internationally recognized expert on African pharma who has occupied various roles in the African pharmaceutical industry. He is the co-author of the *Pharmaceutical Manufacturing Plan for Africa* (2007), and the *National Strategy for Pharmaceutical*  *Manufacturing Development in Ethiopia* (2015). He holds qualifications in medicine, pharmacology and business administration.

**Frederick E. Nytko III** is a post-doctoral research fellow in the Chemistry and Pharmaceutical Sciences Department at Howard University. Dr Nytko received his PhD from the University of Maryland, College Park in 2014, with a specialization in synthetic organic chemistry and transition metal-catalysed coupling reactions. He currently works on both improving the syntheses of commercially available HIV/AIDS and tuberculosis active pharmaceutical ingredients (APIs), and also researching market trends for the international sale of APIs, in order to ensure that equitably priced treatments are available to at-risk individuals in the developing world.

**Lícia de Oliveira** is Director of the Fiocruz Regional Office for Africa in Maputo, Mozambique. A pharmacist by training, Lícia is currently a senior researcher at Farmanguinhos' Institute of Pharmaceutical Technology, Rio de Janeiro, Brazil. She has been the project coordinator for the implementation of SMM drugs factory in Mozambique since its inception.

**Theo Papaioannou** is Reader in Politics of Innovation and Development at the Open University, UK. He has researched and published extensively in the areas of technological innovation, political theory and international development. His recent publications include: 'How inclusive can innovation for development be in the 21st century?' *Journal of Innovation and Development* (2014); 'Innovation and development in search of a political theory of justice' *International Journal of Technology and Globalisation* (2014).

**Giuliano Russo** is Assistant Professor of Health Economics and Policy at Lisbon's Instituto de Higiene e Medicina Tropical. He has over 15 years of professional experience in the academia, public sector and pharmaceutical industry in Europe, Africa and Latin America. His recent research has focussed on the economics of human resources for health, on health systems and pharmaceutical markets in low-income settings, and on health-aid architecture, with a geographical focus on Portuguesespeaking countries.

**Roberto Simonetti** is Senior Lecturer in Economics at the Open University. He carries out research on industrial development, the economics of technological innovation and financialization. In the past, he has contributed to UNCTAD's Least Developed Countries Report, various EU-funded projects on innovation, employment, finance and growth, such as AITEG and FINNOV, and to research on innovation in pharmaceuticals with the Edinburgh-OU ESRC INNOGEN Centre.

**Smita Srinivas** is a faculty member and Director of the Technological Change Lab (TCLab) at Columbia University. Her research centres on technological change and industrial transformation in the process of economic development. Her book, *Market Menagerie: Health and Development in Late Industrial States* (2012), pivots on pharmaceutical and biopharmaceutical capabilities and how nations reconcile their industrial and social goals. Smita sits on expert advisory boards or leads research programmes on industry sectors and inclusion questions in areas such as health, oil and gas, water and waste. She holds a PhD from the Massachusetts Institute of Technology (MIT), past fellowships at Harvard University's John F. Kennedy School of Government, and prior degrees in physics and mathematics. She is a frequent senior expert and advisor to multilateral organizations, development agencies and policy research institutes.

**Kedir Tahir** holds Bachelor's and Master's in Pharmaceutics from the School of Pharmacy, Addis Ababa University and diploma in Marketing Management from the Addis Ababa Commercial College. He combines experience in business development with professional knowledge in the field of pharmaceutical technologies. He is currently a business development manager at V-Tag International Trading PLC. He also works as an independent consultant in pharmaceutical industry development.

**Samuel Wangwe** is Executive Director of REPOA in Dar es Salaam. He has over 40 years' experience as an economist, policy researcher and analyst, policy and economic advisor to the Government of Tanzania. He has authored, co-authored or edited 13 books on development and economic management and over 70 published articles and chapters in journals and edited books.

**Andrew Watkins** holds a BA in Political Science, an MA in Science, Technology and Public Policy, and a PhD in Regional Planning from the London School of Economics. Andrew formerly worked at the National Science Foundation and the National Academy of Engineering in the US. He joined DPP in October 2013 as a research associate. His research interests involve the evolution of regional and sector-based innovation systems, with an emphasis on system functions, entrepreneurial capacity building and related political processes.

**Paul Watts** holds a first class Bachelor's in Chemistry and a PhD in Bio-Organic Natural Product Chemistry from University of Bristol. His PhD focussed on the synthesis of isotopically labelled compounds, for use in determination of biosynthetic pathways to polyketide-derived natural products. He pioneered organic synthesis in micro reactors at the University of Hull. As a lecturer and full professor (2011) he led the micro-reactor and flow technology group which published over 90 highly cited peer-reviewed papers on continuous-flow organic synthesis. In 2013, Prof. Watts moved to Nelson Mandela Metropolitan University (South Africa) to hold the distinguished position of Research Chair in Microfluidic Bio/Chemical Processing.

**Alastair West** is a senior technical advisor for UNIDO's pharmaceutical team. He holds a Bachelor's in Biochemistry from Oxford University and a MBA from IMD in Switzerland. He worked in the pharmaceutical and biotech industries for the first eight tears of his career. After his MBA he joined the World Bank as part of the vaccine team in Washington DC and later worked for the International Finance Corporation as Industry Expert for Life Sciences in the General Services and Manufacturing Division. He has been with UNIDO for six years and has worked on a number of pharmaceutical industry projects in Africa. As part of this work he co-authored the *Business Plan for the Pharmaceutical Manufacturing Plan for Africa* (2012)*.*

# Introduction: African Industrial Development, Values and Health Care

 *Maureen Mackintosh, Geoffrey Banda, Paula Tibandebage and Watu Wamae*

This is a book about the industrial development of pharmaceutical production in Sub-Saharan Africa. Yet the values that drive this industrial enquiry are rooted in the needs of a subcontinent with the worst health status in the world. The central argument of this book is that industrial development in pharmaceuticals and the capabilities it generates are necessary elements in African initiatives to tackle these acute health care needs. A successful pharmaceutical industry is no guarantor of good health care: India indeed has managed to grow a highly successful industry while leaving many of its people without access to competent care. However, without the technological, industrial, intellectual, organizational and research-related capabilities associated with competent pharmaceutical production, the African subcontinent cannot generate the resources to tackle the needs and demands of its population.

The book is a collective endeavour, by a group of editors and authors with a strong African and more broadly Southern presence, to find ways forward that link technological development, investment and industrial growth in pharmaceuticals to improving access to essential good-quality medicines, as part of moving towards universal access to competent health care. This book presents original research, much of it from recent fieldwork in African contexts. The authors include academics, researchers and practitioners, including some who have been or are currently managing pharmaceutical firms in African contexts, and some deeply involved in policy formulation and implementation. We aim to shift the emphasis in international debate towards much more attention to the scope for sustained Africa-based and African-led initiatives to tackle this huge challenge.

In this we are contributing to a shift in mind-set that is already under way. African governments are increasingly considering medicines supply as a national security issue. African Heads of States have adopted the African Union's Pharmaceutical Manufacturing Plan for Africa (African Union, 2007), and regional African bodies are taking similar initiatives. There has also been a sharp shift in approach amongst UN agencies, including WHO and UNAIDS, from earlier critical stances towards support for the development of health sector manufacturing of medicines and supplies in Africa (Sidibé et al., 2014). That shift in turn has built on work by UNIDO with African governments and the African Union (e.g. African Union 2012a 1; UNIDO, 2010; UNIDO/GoT, 2012). Bilateral donors, notably German and Japanese, are actively supporting upgrading in health-related industries.

The book's roots are in historical political economy. The process of building – or failing to build – industrial strengths and industry-health system synergies is long term, as the complex 30-year trajectory of Brazil's health-industrial complex illustrates. The book starts by challenging a highly persistent international myth: that Sub-Saharan Africa has no pharmaceutical industry. On the contrary, the industry has a long history and is strongly embedded in a number of African countries. Operating in a relatively high-skill, high-technology sector, pharmaceutical firms have faced all the well-known challenges of African countries' infrastructural weakness, in skills, utilities and transport, but many have built successful businesses and are investing in technological and product upgrading. Regional inter-country trade is expanding, and new investment opportunities are opening up.

# **The big challenges are twofold**

First, there is the fight to sustain this industrialization effort in the current global market context – which is much more constraining to new competitors than the market context facing, for example, India in the years when it was building its pharmaceutical success story. Multilateral and bilateral policies have reinforced the stringent competition faced by Africa-based medicines producers. A core concept in our analysis is industrial capabilities. In Part I we explore the sources of the organizational, institutional, technical and human capabilities to make good products, to compete profitably in globalized markets that constantly force firms to upgrade, to overcome barriers to market entry and to distribute products effectively.

The second challenge is to ensure that the skills and competence built up by the manufacturers and distributors actually feed into better health care access for African populations. The institutional capabilities of the health system need also to be built up, to support, buy and use effectively locally manufactured supplies. Only on that basis can governments generate policies that bring the interests of the industrial and health sectors closer together, to collaborate for mutual benefit. In Part II we examine some country experiences of health-industry interactions, comparing East African countries' experience with Brazil and India, arguing that health system structure and initiative are as important as industrial policy to successful linkage. The values that underpin the importance of the pharmaceutical sector, its claim to policy priority, are rooted in the ethical requirement of universal access to competent health care.

The chapters in Part III therefore tease out experiences of some of the key aspects of health-industry interactions in more detail and identify some important policy issues to be tackled. All these issues are framed by political economy considerations of the ethics, interests and institutions involved. They include the highly contentious matters of price controls and standard setting for pharmaceutical products, plus examination of sources and problems of financing, the scope for innovative procurement processes that can reflect health system values while providing incentives for industrial investment, and the contested but important role of industrial manufacturers' associations and political lobbying.

This book is a loud challenge to pessimism about African industrial development and health care commitment. African governments have responsibility for their populations' health needs, and cannot address them without industrial expertise. The book explores the *conditions* under which industrial improvement can benefit those who need access to medicines and health care, pulling together the arguments for access and distribution with those for investment and industrial development. There are different routes by which improving supply capacities can generate local health improvement: this book is about how to generate local paths that work. It also identifies ways in which international donors and policy makers can shift from impeding to supporting the long-term development of local industrial and health system capabilities in African countries.

4 *Mackintosh, Banda, Tibandebage and Wamae*

# **Note**

1 . See also http://www.local-pharma-production.net/index.php?id=97 .

Except where otherwise noted, this work is licensed under a Creative Commons Attribution 4.0 Unported License. To view a copy of this license, visit https://creativecommons.org/version4

# **OPEN**

# **Part I**

# **The Pharmaceutical Industry in Africa**

Part I of this book aims to strengthen the inadequate evidence base on pharmaceutical manufacturing on the Sub-Saharan subcontinent. Throughout this book, 'local manufacturing' and 'African manufacturing' refer to manufacture physically located in Sub-Saharan Africa, whatever its ownership. The ownership structures are certainly relevant to understanding the development of pharmaceutical production, and indeed the extent to which the current industry is in African ownership is striking, while most output is produced for local and regional consumption. The African industry is, as we show, highly 'globalized' in the competitive pressures it faces, but also highly 'localized' in its markets and policy frameworks.

Part I therefore starts with an overview of the industry in Africa, tackling the recurrent myth that it barely exists. The four following chapters analyse aspects of the industrial experience of four countries in producing medicines: Kenya, Tanzania, Ethiopia and Mozambique. The chapters do not aim simply to describe the industrial evolution, though that is certainly one objective. They also explore in detail distinct aspects of the industrial histories: the evolution of technological capabilities in Kenya; the challenges in sustaining a relatively shallow industrial sector in Tanzania; the sharp turnaround of the industry in Ethiopia and its links to joint ventures and health sector change; and the immense challenge of starting from scratch in Mozambique, with Brazilian support. In each case, the authors are looking for wider lessons for policy and practice.

The final two chapters in this part are broader, and both also reflect some West African experiences. Chapter 6 asks an important question: What can help to bring more foreign direct investment to the pharmaceutical industry in Africa, with particular reference to Indian companies and Ghanaian experience? Finally, Chapter 7 addresses directly a question raised in several other chapters: What is the scope in African contexts for moving up the technological ladder, into producing the ingredients for medicines manufacture, and into more research and development activity?

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# **OPEN**

# 1 Making Medicines in Africa: An Historical Political Economy Overview

 *Geoffrey Banda, Samuel Wangwe and Maureen Mackintosh*

#### **Introduction**

This chapter sets out to show that, contrary to widespread misperception, pharmaceutical manufacturing in Sub-Saharan Africa is an established industry with a long history dating back at least to the 1930s. Data for the industry on the subcontinent are fragmented and incomplete (Berger et al., 2009; UNIDO, 2010a; 2010b; 2011a; 2011b), and this chapter and this book contribute to building a coherent historical picture and evidence base. This chapter presents some illustrative historical evidence, drawn from secondary data, reports and fieldwork by the authors and colleagues, as well as academic and non-academic literature. 1 We show that neither industrial capabilities in pharmaceuticals nor policy frameworks to support local pharmaceutical manufacture are a new phenomenon on the subcontinent.

The chapter takes an historical political economy lens to the development of the pharmaceutical industry, providing an overview and then examining three countries' industrial history in more depth. By a 'political economy lens' we mean a view of the evolution of the industry that replaces it within its historical political and economic context. Pharmaceuticals share many elements of the broader African experiences of industrialization. The industry also has, however, some very specific characteristics concerning technology and markets.

This chapter briefly traces the pharmaceutical industry's genesis and development in the context of colonial political history, independence and post-independence industrialization. We trace the development of the industry during the era of import substitution policies in the 1960s to 1970s, the economic crises of the 1980s and early 1990s, and the industrial rebuilding from the 1990s onwards. Some key political economy themes that are developed throughout the book are introduced here: the current context of international market liberalization, initiated in the era of economic crisis and structural adjustments policies, and its implications for manufacturing investment; the varying role of multinational corporations' (MNCs) investment in local manufacturing in Africa; the co-evolution and integration of the pharmaceutical industry with other manufacturing and industrial sectors; and the insertion of this relatively high-technology sector into local and international innovation systems and policies.

The chapter begins with an initial historical overview, based on firmlevel evidence from nine Sub-Saharan African countries. It then compares and contrasts the industrial history of pharmaceuticals in three case study countries, Tanzania, Kenya and Zimbabwe, for which we have field data. These three countries cannot represent the highly diverse industrial history of Sub-Saharan Africa (henceforth often referred to as just Africa). Rather, they provide support and background for some of the generalizations suggested by the overview, and identify some illustrative similarities and differences in the pharmaceutical sector's roots and evolutionary trajectories across African countries. The case studies also identify a number of themes explored in depth in the rest of the book.

# **Pharmaceutical manufacturing in Africa: an historical overview**

There has been substantial academic and policy questioning of the feasibility and desirability of African local pharmaceutical production (Kaplan and Laing 2005 is one of the most widely cited sources). We begin by countering this perception with evidence that pharmaceutical manufacturing companies have been setting up production facilities and manufacturing medicines in Africa since the 1930s.

#### **A sketch of a pharmaceutical investment timeline**

Figure 1.1 shows a time line of the pattern of establishment of pharmaceutical firms across different political and economic geographies on the African continent. It is drawn from a data base of start-up dates for manufacturing by larger pharmaceutical firms in a number of the major manufacturing countries in Sub-Saharan Africa, including South Africa, Nigeria, Kenya and Zimbabwe, and also some countries with smaller manufacturing sectors: Tanzania, Botswana, Uganda, Ethiopia and Ghana.

#### *Figure 1.1* A timeline of selected pharmaceutical firm start-ups by country, 1930–2013

*Source* : drawn by author from created database.

The genesis of local pharmaceuticals manufacturing in South Africa, Nigeria and Kenya appears here as linked to multinational European companies setting up subsidiaries in colonies. In South Africa, Abbott was set up in 1935; in Nigeria, May and Baker was established in 1944; and in Kenya, Glaxo set up shop in 1930 (Figure 1.1). The whole period from 1930 to 1960 shows a slow take-off of local manufacturing in Kenya, Nigeria, South Africa and Zimbabwe. Historically these are the leading industrial countries in Sub-Saharan Africa. Local pharmaceutical industry set up did not occur in isolation, but was contemporary with the rise of other industrial sectors that supported mining and agricultural processing industries. Some of this industrialization was driven by pre-war supply chains with colonies and the disruptions of supplies during World War II.

Figure 1.1 suggests two major bursts of activity in setting up pharmaceutical firms. The first is the 1970s, starting in the 1960s and building up. Then there is a gap in the 1980s and early 1990s, when the rate of start-ups slows almost to zero. The second major burst of activity is from the mid-1990s and continuing into this century.

For most of the countries in Figure 1.1, the 1960s and 1970s were the early years of independence. Across the subcontinent, this postindependence era was characterized by efforts to tackle the challenge of industrialization and growth. Common approaches to industrial policy, promoted also in the development economics and planning literature, mixed public sector investment with import substitution policies, as briefly described in the case studies below. These were years of active developmental states in Africa (Mkandawire, 2001), which were also investing in public sector health and education provision to address the colonial legacies of inequality and discrimination. Domestic production of medicines, by public sector firms and locally owned private companies, found a market in expanding health sector demand.

By the late 1970s, however, this industrial development model was in trouble, and the impact of the economic crisis is reflected in Figure 1.1 by the dearth of new industrial investments in the 1980s. Key events included the oil crises of the 1970s, which severely inflated import bills, undermined balance of payments and fiscal balances and slowed down industrial activity through lack of foreign exchange. The early 1980s were years of severe economic crisis in many countries, exacerbated by severe drought.

The response across much of Africa took the form of structural adjustment programmes, linked to International Monetary Fund fiscal support and requiring extensive privatization and liberalization of trade. The timing varied: Ghana, for example, embarked on structural adjustment as early as 1983, whereas Zimbabwe only started in 1991.

The 1980s and early 1990s were, as a result, a period of deindustrialization across much of Africa. Previous industrial gains were eroded in many countries, and economic growth turned to decline, while health and education also suffered severely (Cornia et al., 1987). This is the context for the pause in industrial investment evident in Figure 1.1: the case studies that follow add some detail on this period, including the fate of existing firms and the distinctive experience of Zimbabwe.

From the mid-1990s, Figure 1.1 shows industrial investment in new pharmaceutical plants restarting across many countries. Much of this investment was by local investors. In some countries after independence, local entrepreneurs with working experience gained in multinational companies set up their own production facilities, a phenomenon not dissimilar to the Indian pharmaceutical industry evolution.

#### **Pharmaceutical manufacturing capabilities in Africa: an overview**

In 2005, a survey found that 37 of 46 African countries possessed some pharmaceutical manufacturing capability (Berger et al., 2009). Since then, numbers and activity have continued to expand (Figure 1.1). Almost all this manufacturing capacity produces generic medicines. Generic medicines are copies of originator or innovator branded medicines; generics have the same dosage form, therapeutic effect, delivery route, known risks and side effects as the originator drug. Local manufacturers in Africa import active pharmaceutical ingredients (APIs) and excipients mainly from India and China (UNIDO, 2010a; 2010b; 2011a; 2011b). Active pharmaceutical ingredients are the therapeutic component of the drug, while excipients are pharmacologically inactive substances used as a carrier for the active ingredients of a medication or as lubricants during the manufacturing process. Local firms import plant, equipment and machinery from India and China, while analytical equipment is sourced mainly from high-income countries such as Germany. Only South Africa and Ghana had built some technological capabilities to manufacture APIs locally, according to the 2005 survey (Berger et al., 2009), though other countries are now seeking to do so as well (see Chapter 7).

The pharmaceutical technologies in use, and the range of pharmaceutical drugs manufactured in African countries, are extensive. Firms have progressed from producing basic tablets and capsules to more complex technologies such as layered and sustained-release tablets. Product portfolios include suspensions and creams, syrups for children, sprays for inhalation and a range of sterile products such as injectables and ophthalmic preparations. The range of medicines includes anti-pain, anti-infectives including the penicillins, anti-worms and anti-virals, including anti-retrovirals for HIV/AIDS. There is a concerted effort to move into more products for chronic diseases such as hypertension and diabetes that are on the rise, implying a growing market.

#### **Three indicative country case studies**

The rest of this chapter briefly compares the industrial evolution of the pharmaceutical industry in three contrasting countries: Zimbabwe, Kenya and Tanzania. We show that their pharmaceutical sectors did not arise in isolation: in each case, the pharmaceutical industry co-evolved in important aspects with the broader industrial development. National patterns of industrial growth and periods of deindustrialization, along with shifts in industrial ownership and financing, are reflected in pharmaceutical firms' evolution. Broad industrial, macroeconomic and political economy influences are shared across industries in national industrial histories.

However, pharmaceuticals also display distinctive industrial characteristics that are observable across countries. The most striking are the technological challenges embodied in pharmaceutical production; the increasing regulatory impact on the African-based industry; and the implications of the health sector structure and funding, including the rise of donor funding, on the evolution of the local industrial structure. These issues are all explored in depth in the rest of the book. Here we present a comparative sketch of three pharmaceutical industrial histories, as an introduction to the analyses to come.

These historical sketches also employ some key concepts that will be used throughout the book, notably the concept of industrial capabilities. Given the high-skill, technologically demanding requirements of pharmaceutical production, as compared to widely produced consumer goods in these countries, the technological capabilities of the firms are key to their efforts to sustain competitiveness. By 'technological capabilities' we mean a set of skills and information the firm requires to operate a given technology and its associated organizational system efficiently (Wangwe, 1995). Firms' competitiveness in pharmaceuticals depends on their ability to obtain, absorb and use technological knowledge, capabilities which build on past skills and knowledge to cumulative effect. Successful firms' capabilities evolve from simpler to more complex activities in investment and process and product engineering (Lall, 1992).

### **Zimbabwe: the loss of early industrial advantage**

There are elements of triumph and tragedy in the industrial history of Zimbabwe. As early as 1990, it was, after South Africa, touted as the next newly industrializing country (Pangeti et al., 2000; Phimister, 2000). The well-established and vibrant manufacturing sector was one of the most advanced and diversified in Africa (AfDB, 1994), contributing 30% to GDP and accounting for 35% of the country's gross export earnings. There were extensive linkages between manufacturing and key economic sectors such as mining, finance and agriculture. The manufacturing sector evolved to supply mining and agriculture, leveraging an extensive infrastructure (Mlambo, 2000; Phimister, 1988; 2000). Zimbabwe therefore provides a narrative of a pharmaceutical sector that arose in integration with other manufacturing and service sectors, illustrating the importance of linkages and support structures in an economy.

#### **Early import substitution**

The distinctive history of Zimbabwean manufacturing results from its political history and the related push towards industrial development through import substitution. The legacy begins from the Second World War era. Before then, the country was a destination for British and South African manufactures. During the war, the blockade of traditional trade routes from Britain and the resultant shortages prompted local industrial diversification and accelerated growth of local manufacturing. The average annual industrial growth from 1944 to 1948 was 24.4% (Pangeti et al., 2000). Later, the unilateral declaration of independence (UDI) from Britain in 1965, the trade with South Africa and the resulting UN sanctions (Pangeti et al., 2000; Phimister, 2000) reinforced the push towards industrial self-supply.

Zimbabwe's industrial history illustrates the potential benefits of import-substituting industrialization for countries that later liberalize trade. After 1945, imports from overseas recommenced, increasing competition. Local industry responded by turning to regional markets as an outlet for industrial overcapacity. The expanded markets included the 1953 Central African Federation (CAF) of Zambia, Zimbabwe and Malawi (then Northern and Southern Rhodesia and Nyasaland) (Pangeti et al., 2000). During this era, foreign direct investment by South African and British companies flowed into local manufacturing industry (Phimister, 2000). Industrial protection and import substitution were then vigorously pursued after UDI.

During the early expansionary phase, two of the five major pharmaceutical companies were established: CAPS Pharmaceuticals and Datlabs. The pioneer company, CAPS Pharmaceuticals (then Central African Pharmaceuticals [Private] Limited), was founded in 1953, manufacturing formulations and wholesaling (UNIDO, 2011b). In 1958, CAPS stopped general wholesaling and focussed on manufacturing (CAPS website, 2012). Datlabs (Pvt) Ltd was set up in 1954 as a subsidiary of Ingrams, a South African company (UNIDO, 2007; 2011b). These companies focussed on serving the regional market in the Central African Federation countries. A third major pharmaceutical company, Pharmanova (Pvt) Ltd, was established later, in 1970 in the UDI era (UNIDO, 2007). This period created an industrial base second only to South Africa in the region, including established pharmaceutical producers, inherited in 1980 by the independent government.

### **Industry–health care integration**

A country's domestic market for pharmaceuticals is dependent on its health care spending and health care structure. At independence the new Zimbabwean government targeted the narrowing of the inherited racial gap in living standards by introducing free health care and education for all as key elements of social transformation (Davies and Ratso, 2000). Zimbabwe became renowned for high growth in education, health and public administration to promote social equity in development (Helmsing, 1990). The country also continued its inherited historically high level of reliance on domestically produced medicines (Turshen, 2001).

Zimbabwe also made a pragmatic and early shift to cheaper generic prescription policies to reduce cost of medicines: in 1981, the Ministry of Health produced an essential drugs list (EDLIZ) (WHO, 1995), and this formed the basis for local medicines production strategies. Zimbabwean entrepreneurs established Varichem Pharmaceuticals (Pvt) Ltd in 1985 to serve this expanding market (UNIDO, 2007).

The government also took industrial policy steps to address some of the consequences of 15 years of political unrest, liberation war and sanctions. Industrial machinery had become obsolete due to scarcity of foreign exchange, which continued into the early years of independence (Bond, 1998; Phimister, 1988; Chifamba, 2003). Companies struggled to import capital equipment and upgrade their technologies. The government partially eased foreign-exchange restrictions for verified export orders through an Export Revolving Fund (ERF) in 1983, followed by an Export Retention Scheme (ERS) in 1989 and later an Open General Import Licence (OGIL) in mid-1990s (Chifamba, 2003).

However, Zimbabwe was not spared the economic crises that swept across African countries from the mid-1980s. Expansion of social services without rising revenues led to budget deficits, forcing the government to abandon their initial resistance to economic structural adjustment programmes (AfDB, 1998). On the advice of the IMF and technocrats in the Ministry of Finance, the country embarked on a structural adjustment programme in 1991. Disastrous economic outcomes included deindustrialization, unemployment and deterioration of the health care system (AfDB, 1997; Brett, 2005; Richardson, 2005).

Despite the deteriorating industrial and economic conditions, however, Plus 5 Pharmaceuticals was established in 1996. The start-up used venture capital funding (UNIDO, 2007; 2011b), a testament to Zimbabwe's financial system's capability at the time, despite deindustrialization, and also to the continuing vibrancy of the pharmaceutical sector. The country continued to rely on locally manufactured medicines (Turshen, 2001), and Zimbabwe appears to have sustained some alignment of industrial and health policy goals through this tumultuous period.

#### **Pharmaceuticals in an era of economic collapse**

After 1997, however, economic collapse set in. The decade from 1997 to 2008 saw deindustrialization on a grand scale, as manufacturing decline was driven by hyperinflation (MTDP, 2010). Manufacturing real growth rates were negative every year from 1997 to 2008 except 2005, signifying declining manufacturing capacity as well as loss of skills and technological capabilities. Manufacturing share of GDP fell from 20% in 1997 to 11% in 2008 while GDP shrank annually. The manufacturing share of exports fell from 20% to slightly over 10%. The private sector declined to the point of operating at 10% capacity, faced with shortage of capital, foreign currency, and interrupted electricity supplies. Physical infrastructure crumbled, skilled people emigrated and incentives and institutions were severely debilitated (AfDB, 2009).

Yet even in this era, aligned industry, health and social development policies did create some positive feedback mechanisms, enhancing local manufacturers' innovative capabilities. This environment was instrumental in the country being one of the first in Africa to locally manufacture anti-retroviral medicines (ARVs) to address the HIV/AIDS pandemic (Banda, 2013). As Chapter 15 describes, in 2002 Zimbabwe issued a compulsory licence allowing its local manufacturers to produce ARVs. This demonstrated purposive application of political will and policy infrastructure, associated with sustained local manufacturing capabilities, to meet a pressing health and social need.

However, the economic crisis created a cumulative collapse in the public health system's capacity to procure drugs over the period from 2003 to 2009. The country shifted to high donor dependence for public health care funding and drug procurement (Banda, 2013). In addition there was international political isolation, acute shortage of foreign currency and dwindling foreign direct investment (FDI) coupled with skilled resources flight (AfDB, 1997; Brett, 2005). The greatest challenge for local pharmaceutical industry was the loss of public health procurement as an industry policy tool (NECF, 2010). The increased reliance on donor funding posed a demand-side constraint for local firms: drugs for HIV/AIDS, TB and malaria were procured externally because the national procurement agency NATPHARM was incapacitated through lack of funds.

#### **Current pharmaceutical manufacture in Zimbabwe**

When the government of national unity was formed in 2009, there were various initiatives to resuscitate and rehabilitate the economy. Key strategies in the Short Term Economic Recovery Programme (STERP, 2009) were social protection, including food and humanitarian assistance and education. For health care, the focus was on building capacity in human resources, drugs and medical equipment availability, and reduction of preventable diseases. The health delivery strategy included addressing drug shortages: drug stocks in 2008 were just 36% of requirements, and stock-outs of essential drugs, vaccines and medical supplies had become common. The strategy also included capacitating NATPHARM, the national drug procurement agency, to supply government health institutions. There was a gradual improvement in the sector in the 2011–14 period.

The pharmaceutical industry in Zimbabwe now consists of nine pharmaceutical manufacturing companies registered with the Medicines Control Authority of Zimbabwe (MCAZ). Of these, five are the major generic manufacturers accounting for 90% of the formulation businesses (UNIDO, 2011b). The companies operate in a competitionintensive, low-margin commodity-type business, where profitability and long-term viability depend on economies of scale, assured demand and large markets (Berger et al., 2009). Currently the country is capable of producing 50% of all drugs on the essential drugs list, and if all research and development (R&D) activities in formulations are taken into account, the capability rises to supplying 75% (NECF, 2011). Firms used to export quite extensively in the East African region, and also to Namibia, Angola and South Africa (UNIDO, 2007; 2011b). In 2014, the local industry supplied medicines to the health sector valued at US\$24 million compared to US\$184.7 million of imported medicines and US\$100.4 million of donated medicines (Zimstats, nd).

While Zimbabwe's experience shows that African countries can manufacture drugs for their local health system, and illustrates some ways in which health and industrial policies can be aligned, it is also a grim history of how economic crisis drives loss of industrial development opportunities in pharmaceuticals.

### **Kenya: creating the dominant East African producer**

Kenya, like Zimbabwe, has a long history of pharmaceutical production. Local pharmaceutical manufacture can be traced back to the 1940s. The pioneer firm was the Kenya Overseas Company, established in 1947 and beginning local manufacturing activities in 1948. The next batch of firms included Sterling Winthrop (US), established in 1953; Burroughs Wellcome (East Africa) Ltd (UK) in 1955; and Aspro-Nicholas (EA) Ltd (Australia) in 1961 (Wamae and Kariuki Kungu, 2014). The early firms built up initial skills and experience in pharmaceutical manufacture in Kenya before independence in 1963.

After independence, Kenya also pursued policies of import-substituting industrialization (described and explained in Chapter 2). These policies supported manufacturing for the domestic market in the face of the 1970s balance-of-payments crises and rising oil prices. In this period pharmaceutical manufacturing expanded, benefitting from the industrial protection, and also from an active government policy to promote investment and technological upgrading. The government established the Industrial and Commercial Development Corporation (ICDC) to provide development finance, and supported a number of parastatal joint ventures, including Dawa and Infusion Medicare. The firms of Lab & Allied and Cosmos were also set up in this period.

The mid-1980s and 1990s saw in Kenya, as across Sub-Saharan Africa, a process of market liberalization, associated with structural adjustment programmes, and a shift to export promotion. In Kenya, export promotion included a number of schemes to allow bonded production for exports using duty-free inputs, but this had little impact on pharmaceuticals (Chapter 2). The early 1990s in Kenya also saw a push to 'buy local', using local health section procurement to benefit industrial development. There was industrial investment in pharmaceuticals production in this period, including Universal (Figure 1.1).

By the turn of the century, the Kenyan domestic medicines market was opening up in familiar ways to more global competition, notably from South Asia. Donors moved in to supply medicines for malaria, TB and especially HIV/AIDS, but this was later and more patchy in Kenya than in some neighbouring countries (Chapter 2). The relative strength of the production capabilities of the Kenyan industry by 2001 allowed the government to decide to permit compulsory licensing of generic production of HIV/AIDS medicines, and the subsequent issuing of voluntary licences (UNIDO, 2010a; see also Chapter 2). However import liberalization was by this date generating increasing competition from imports of finished formulations, and this seems to have been a factor in the departure of a number of multinational producers. In 2014, almost all pharmaceutical firms in Kenya were locally owned (Chapter 2).

#### **A local industry with regional potential**

In February 2014, Kenya had 39 pharmaceutical manufacturers registered with the Pharmacy and Poisons Board (PPB). Thirty-four were producing pharmaceuticals for human health, while the rest concentrated on veterinary products (Wamae and Kariuki Kungu, 2014). There were also 20 multinational firms with local representation for marketing purposes and /or involved in clinical trials.

Like the firms in Zimbabwe, Kenyan pharmaceutical activities are mainly production of finished formulations, with some reformulation and development activities. The industry mainly produces generic products, importing APIs, excipients and other raw materials from India, China and Germany. India dominates both raw materials and finished product imports, accounting for 40% of all pharmaceutical-related imports in 2008 (UNIDO, 2010a: 49). Few key inputs can be sourced locally; exceptions are maize starch, sugar and glucose syrup, rectified spirit and ethanol, as well as sodium chloride and quite a wide range of packaging materials. 2

The Kenyan industry continues to suffer from relative low capacity utilization, and Chapter 2 explores the reasons for this in detail. They include limitations in the functioning state of machinery, delays in sourcing spare parts from abroad and human resource issues, in particular shortages of highly specialized skills in some critical areas such as product development.

Despite these constraints, Kenya's pharmaceutical sector is the strongest producer of pharmaceuticals in the East African region, and is upgrading to more demanding technological capabilities. In addition to the standard generic products in the dosage forms of tablets, capsules, creams and syrups, the industry in Kenya includes three firms producing injectable infusions (small and large volume parenteral preparations) and ophthalmic formulations. One firm (Universal) has achieved WHO prequalification for one of its products, allowing the firm to tender for donor contracts and also providing an indicator of the firm's technical capabilities and standards.

A further measure of the strength of Kenya-based pharmaceutical production is its export success, which accelerated from about 2002. Kenyan pharmaceutical producers' main export destinations are in the COMESA region: the Common Market for Eastern and Southern Africa, which does not include South Africa or Tanzania. 3 However, the Kenyan industry still supplies a tiny fraction of COMESA's medicines market, while provisioning only around a quarter of its own domestic market. There is substantial room for expansion. With supportive government policies, Kenya should be able to exploit effectively the integration of East African and Southern African markets to expand its role as one of the medicines production 'hubs' in Sub-Saharan Africa. Chapter 2 discusses the industrial challenges in depth.

#### **Tanzania: a latecomer under stress**

Tanzania has a shorter history of pharmaceutical manufacturing than the two countries just discussed. In the colonial period during World War II, facilities for manufacturing simple medicines were established to counter the risk of blockade. However, after the war, these closed, and the country reverted to imports. The mainland, then called Tanganyika, did not, unlike Zimbabwe and Kenya, have a large colonial settler population in the pre-independence period, and the level of industrialization at independence was correspondingly small.

#### **Pioneering firms and public sector investment**

The earliest pharmaceutical manufacturing firm in Tanzania seems to have been Mansoor Daya Chemicals Ltd., a privately owned firm. Mr. Daya, a pharmacist, began with a retail pharmacy in Dar es Salaam in 1959. He set up his own firm in 1962, originally in a small godown, later moving to his current production site. 4

In the 1960s and early 1970s, the Nyerere government in Tanzania turned to the promotion of industrial development through public investment. In contrast to Kenya, the industrial policies were driven by a more explicitly socialist agenda, although, as the case studies in this chapter illustrate, the use of public investment to promote industrial development was a broadly implemented approach in these post-independence years (Lall and Wangwe, 1998). Manufacturing output rose from 4% of GDP at independence to about 8% or 9% in the 1970s. The production was mainly oriented to the domestic market, although there was a slow growth of manufacturing exports to East Africa, until these markets were lost with the break-up of the East African Community in 1977 (Bagachwa and Mbelle, 1995).

This was a period of import-substituting policies, paralleling those in Zimbabwe and Kenya, with an overvalued exchange rate, import controls, protective tariffs and administrative allocation of foreign exchange. It was also a period of state-led industrialization, including public sector investments in manufacturing plants. Two public sector pharmaceutical firms were established to provide essential medicines to a rapidly expanding public health sector. Keko Pharmaceuticals was opened as a production unit within the Ministry of Health in 1968 to supply tablets, capsules and large-volume parenterals for distribution to public sector health care facilities. Tanzania Pharmaceutical Industries Ltd (TPI) began as a public enterprise in 1978 with assistance from the Finnish government.

This was thus a period when the government was placing priority on expanding health care to serve a basic need, and the pharmaceutical industry responded to an alignment of industrial and health policies. The industrial strategy prioritized production to meet basic needs, including health care, creating a conducive environment for investment in pharmaceuticals. Private clinical practice was banned in 1977, except for some religious providers, and the main market for medicines was the public sector, plus retail pharmacies. However, the domestic market expansion was sufficiently attractive for a second private start-up, Shelys Pharmaceuticals, which began production in 1979. In 1984, Shelys was bought by the Tanzanian Sumaria Group of companies and built up into the largest pharmaceutical firm in the country.

#### **Economic crisis and liberalization**

Like our other other case-study countries in this chapter, Tanzania was hit by a major economic crisis in the 1980s. However, the impact in Tanzania was particularly severe, a result of a confluence of circumstances including a small and particularly internationally uncompetitive manufacturing sector focussing on consumer goods for the domestic market, and a liberalization process that was rapid and relatively unconstrained by transitional policy safeguards. The late 1970s and early 1980s were marked by severe shortages of goods, as foreign exchange constraints reduced inputs to local production and export manufacturing declined. Capacity utilization dropped dramatically, and manufacturing output fell back to 7% of GDP by 1985 (Bagachwa and Mbelle, 1995). Pharmaceutical manufacturers were badly affected by foreign exchange shortages that constrained their ability to import APIs and other key inputs.

The major policy framework reversal was signalled by the adoption of the Economic Recovery Programme (ERP) in 1986. This shifted policy sharply away from import substitution, liberalizing imports of final goods and providing export incentives for manufacturers. While there was some export recovery, production of consumer goods for the domestic market suffered badly as cheaper imports flowed in. Given the prior levels of industrial protection in Tanzania, the liberalization constituted a much more severe shock than in Kenya or Zimbabwe, where protection had been lower and transition was better managed. Firms in Tanzania had little time for adjustment (Lall and Wangwe, 1998: 93). The result in Tanzania was a swathe of deindustrialization, and firms serving the domestic market failed.

Pharmaceuticals faced a second challenge also: the 'battering' taken by public sector health care funding and other government provided social services as the government budget went into severe crisis (Kaijage and Tibaijuka, 1996). As a result, the two government firms, Keko and TPI, ceased to be able to compete with imported medicines, lost their markets, and closed in the early 1990s. However, the two private pharmaceutical producers, Mansoor Daya Chemicals and Shelys, survived the economic crisis years. Shelys in particular was built up into a successful business as the largest pharmaceutical firm in Tanzania and expanded exports to the region. Another privately owned local firm, Interchem Pharmaceuticals was set up in 1989 in Moshi, part-owned by the IPP group of companies.

#### **The challenges of competitiveness and upgrading**

Industrial research in the 1990s emphasized the importance of firms' technological capabilities for survival and competitiveness in a more open economy (Wangwe, 1995). In the late 1990s and early 2000s, some of these technological capabilities were rebuilt in Tanzania, in pharmaceuticals as in other industries. The challenge was particularly great in pharmaceuticals given its reliance on skills and ability to manage technological upgrading effectively.

However, from the late 1990s, the pharmaceutical industry in Tanzania was renewed and grew substantially, entirely through the efforts of local investors and managers. The government sold 60% of the equity in each of the inactive government firms, Keko and TPI, to private Tanzanian investors in 1995. Both reopened in the late 1990s. In 2003, Shelys bought Beta Healthcare International, a Kenyan pharmaceutical company (previously Boots), with private equity funding from Aureos Capital. This was the first cross-border merger whereby a Tanzanian firm purchased a Kenyan company, and it made Shelys Africa Group the largest East African pharmaceutical company at that time. 5

By 2009, the high point of Tanzanian pharmaceutical production, there were eight firms producing for the local market and also exporting regionally. The new firms were started by a mix of local and international investment. Tanzansino started production in 2000 as a joint venture between the Tanzanian military and a Chinese provincial government body. In 2007, the ownership changed when the Chinese provincial government shares were bought by Holley Industrial Group Ltd., a Chinese industrial group including a firm producing and exporting one of the new artemisinin-based combination therapies for malaria. 6 AA Pharmaceuticals, a smaller firm established by a Tanzanian private investor who is a pharmacist, began production in 2002. And in 2007, a new plant, Zenufa Laboratories, was built and opened. Owned by a DRC (Congo)-based diversified family firm, Zenufa aimed for Good Manufacturing Practice status from the start. These new start-ups reflected the changed economic circumstances in Tanzania: faced with sharp external competition, they aimed for efficient manufacturing and regional export capability from the beginning.

Data are not easy to assemble, but Table 1.1 provides a summary overview of the pharmaceutical industry in Tanzania just before the start-up of Zenufa. Seven firms were then active. Shelys at that time was responsible for about half of local production by value (Table 1.1). Much of the rest of the output was supplied by TPI, Interchem and Keko. The main suppliers to the public wholesaler (MSD) were Shelys, TPI and Keko, while Shelys was also the main exporter. Chapter 3 analyses the Tanzanian industry after this date.

# **Conclusion: shifting the debate**

This chapter aimed to dispel the persistent myth that pharmaceutical production is not an African industry, tracing the long industrial history of the production of medicines on the Sub-Saharan subcontinent. This

*Table 1.1.* Pharmaceutical production and exports, Tanzania, 2004–05

*Source*: Compiled by the authors from data in MoHSW (2006). Data in Tanzanian shillings in that source converted to US\$ using the average exchange rate of 0.00095 for the year July 2004–June 2005 obtained from www.oanda.com .

book aims to contribute to shifting the whole debate on *making medicines in Africa* definitively away from 'Should it be done?' to 'How can it be done well to the benefit of public health?' Despite the successes to date, local manufacturers serve only a small proportion of African domestic demand, let alone population need (Berger et al., 2009; UNCTAD, 2011; WHO, 2005; 2011). The bulk of medicines consumed are imported from India and China, and there is heavy reliance on disease-specific donorfunded imports. That situation is not sustainable. African countries need to grow their capabilities to address the health needs of their populations, and pharmaceutical manufacturing and its associated technical and scientific bases are needed for that effort.

Nationally and across the African subcontinent, efforts to expand local manufacturing and innovation are extensive. The business case for local drug manufacture – and its potential to enhance security of medicines supply – has gained ground within African Union (AU) and New Partnership for Africa's Economic Development (NEPAD) circles. Not all countries have the capacity and capability to embark on the full spectrum of pharmaceutical production, innovation and R&D. The *Strengthening Pharmaceutical Innovation in Africa* strategy report (Berger et al., 2009) and the UNIDO-AU-sponsored African Pharmaceutical Manufacturing Plan of Action (AU-UNIDO, 2013) propose a phased approach of working up the technological ladder (see Chapter 15). Given the current rates of investment and industrial development in pharmaceuticals, the debate now concerns the policy and business determinants of cost-effective manufacture of safe and efficacious medicines, and the conditions for aligning industry, finance and public health needs. The mechanics of achieving this become a matter of strategic intent at national, regional and continental levels. This is the terrain this book explores.

# **Notes**

Except where otherwise noted, this work is licensed under a Creative Commons Attribution 4.0 Unported License. To view a copy of this license, visit https://creativecommons.org/version4

# 2 Pharmaceuticals in Kenya: The Evolution of Technological Capabilities

 *Roberto Simonetti, Norman Clark and Watu Wamae*

# **Introduction**

As Chapter 1 briefly outlined, Kenya has a strong and long-standing pharmaceutical industry. A 2015 Business Monitor report on pharmaceutical manufacturing in Kenya states that the country hosts the largest pharmaceutical industrial base in East Africa. The report also sees a bright future as a 'potential base for export across East Africa' (BMI Research, 2015). This chapter locates the Kenyan pharmaceutical industry within the country's historical context of industrial development and growth.

The features of the local production of medicines are shaped by the characteristics of the Kenyan economic and industrial systems, which in turn are the product of its economic history. To analyse this shaping, this chapter briefly presents and then applies an evolutionary economic understanding of industrial capabilities, focusing particularly on technological capabilities at the firm and industrial system level, their sources and evolution. This framework of industrial analysis is also used in a number of subsequent chapters in this book. It is particularly illuminating for the analysis of the development of an industry, pharmaceuticals, that is technologically demanding relative to the industrial and economic context in a low-income country such as Kenya.

Pharmaceutical manufacturers face constant competitive and regulatory pressure to upgrade their technological capabilities, and the evolutionary framework of analysis emphasizes the extent to which this upgrading relies on both firm-level investment building on existing capabilities, and also on the benefits that accrue from its surrounding industrial base. Chapter 1 briefly noted that African countries' broader industrial base frequently stems in turn from an era of policy-led import-substituting industrialization. This chapter explores in more detail how the pharmaceutical industry has built on this basis in Kenya, and the scope that gives the industry for exploiting the opportunities opened up by the subsequent more liberalized and competitive markets. It also outlines some of policy decisions that have shaped the industry's development, and some of the challenges for firms and policy makers.

This chapter draws on a range of sources, including trade and manufacturing data, secondary published and grey literature sources and also interviews with manufacturers and distributors and other field data collected in 2012–14. 1

# **The evolution of Kenya's pharmaceutical industry in the context of post-colonial industrialization**

The profile of the pharmaceutical industry in Kenya is influenced by the country's broader economic and industrial history. The post-independence industrial history of Kenya can be split into three periods according to the policy regimes adopted: the early years of import substitution industrialization (ISI), until the 1970s; the liberalization and gradual opening up of the economy in the 1980s and 1990s; and the new millennium (Chege, Ngui and Kimiyu, 2014).

Pharmaceutical production was already taking place before the advent of independence in 1963, as Chapter 1 described. The early firms were mainly foreign direct investments (FDI). The newly independent country then continued to implement policies of ISI that had started during the colonial period.

Import-substituting industrialization is a set of economic and trade policies that aim to promote domestic industrialization in order to reduce the country's dependence on manufacturing from abroad. The policies seek to promote the accumulation of skills, capital and knowledge for the production of manufacturing goods by limiting imports of selected manufacturing goods through a variety of trade restrictions and subsidizing domestic manufacturing enterprises. In the Kenyan case, local producers were shielded from foreign competition in manufactures in a variety of ways. High tariffs, even reaching 100% of the goods' value, and quotas were imposed on imported manufactures, which were also charged higher rail fares, with the result that their prices were high for Kenyan consumers. Domestic manufacturing firms were also helped with financial subsidies, allocated land for production facilities, and allowed to have import duties refunded on the inputs (raw materials and equipment) they had to import for production.

The Kenyan government also explicitly welcomed foreign-owned firms who set up production facilities in the country, as they contributed to the domestic industrial development. The large weight of FDI in Kenyan industry of the colonial period is also typical of the early years of independence, when it even reached half of industrial output (Maxon, 1992). Fearing a flight of FDI, a year after independence, in 1964, the government passed the Foreign Investment Act, which gave reassurances to foreign firms in areas such as repatriation of profits and protection from nationalization.

This policy orientation towards manufacturing for the domestic market was reinforced in the 1970s by balance-of-payments crises and rising oil prices which led to scarcity of foreign exchange. Manufacturing of consumer goods for the local market expanded rapidly in the early 1970s, and there was diversification into upstream supplier industries such as plastics. In this period, pharmaceutical manufacturing expanded, benefitting from the industrial protection, and also from an active government policy to promote investment and technological upgrading. Laboratories & Allied was incorporated in 1970. The government established the Industrial and Commercial Development Corporation (ICDC) to promote the inclusion of local people in industry by providing development finance and technical assistance. ICDC helped to develop pharmaceutical production in this period through parastatal joint ventures. Dawa was established as a 1970s joint venture between the ICDC and the Yugoslav government. A firm producing infusions, Infusion Medicare, began in the mid-1970s as a joint venture between the ICDC and Hoechst E.A. (the latter the East African arm of a German pharmaceutical producer now part of Sanofi).

ISI policy in this period successfully created an industrial base in Kenya, especially in light consumer industries such as textile and foodstuffs, but also in others such as metal products. Between independence and 1980, industrial output quadrupled, the share of GDP in manufacturing grew from 10.1% to 13.3% and the number of industrial establishments more than doubled (Ogonda, 1992: 297–98). The increase in local manufacturing reduced the multinational companies' (MNCs) share of industrial output, which however still accounted for 20% of industrial output in the early 1970s (Maxon, 1992: 385).

However, the protection from international competition encouraged local firms to focus on the protected local market and neglect exports. This created an anti-export bias that, together with external shocks such as the oil crises and a deterioration of terms of trade, led to a shortage of foreign exchange. In 1980 Kenya had to take a loan with the World Bank, which imposed structural adjustment conditions. This marked the beginning of the phase of liberalization and structural adjustment policies in the mid-1980s and 1990s, as it happened across Sub-Saharan Africa, and the beginning of a shift to export promotion. In Kenya, export promotion included a number of measures to allow production for exports using duty-free inputs, but the implementation was slow and tentative, with little impact on export.

The gradual opening up of local markets created competition that had an adverse impact on local industrial activity. Shortage in foreign currency contributed to the decline of domestic industry as firms found it difficult to buy foreign inputs and equipment, with adverse effects on capacity utilization and therefore productivity. After an economic crisis at the beginning of the 1990s, liberalization and export promotion accelerated with the creation of Export Promotion Zones (EPZs), participation in the Common Market for Eastern and Southern Africa (COMESA) and the East Africa Community (EAC), and the removal of price controls in 1994. Export promotion and international competition, however, had little impact on pharmaceuticals in that period. More important was a push in the 1990s to 'buy local', aiming, for example to ensure that basic medicines kits should be 50% local products (Wamae and Kariuki Kungu, 2014). Local pharmaceutical companies benefitted from this policy – an example of active use of health sector procurement as an industrial policy. Among the larger Kenyan manufacturers, Regal was established in the 1980s and Universal in the 1990s. Parastatal firms were privatized.

The third phase of industrial development, in the new millennium, saw an increase in exports especially in textiles through the United States' African Growth and Opportunity Act (AGOA), which facilitated exports to the US and increased activity in EPZs. In spite of this new push to promote exports, the pressure of global competition from other low-income countries has meant that the share of manufacturing in total GDP has not changed significantly, and much of industrial activity is still carried out in the informal sector by micro enterprises, whose small size makes it difficult to find funds for investment, expansion and upgrading. During these years, most of the foreign MNCs also ceased to produce in Kenya as they reorganized their supply chains globally in the light of competition from China and India to find cheaper locations for production. It is possible that local producers may have benefitted from the flight of production from MNCs, being able to take their place in some market segments and absorbing employees already trained by foreign MNCs.

The development of Kenya's pharmaceutical industry suggests that ISI policies were important to build an initial industrial base. Previous analyses of industrialization have argued the ISI policies followed by careful liberalization and export promotion might be useful to promote industrialization (see, e.g., Athreye, 2004, for the Indian software industry). So it is possible that ISI policies enabled Kenya to start the accumulation of basic technological know-how, perhaps through parastatal joint ventures, such as those formed by ICDC, in spite of their problems. The opening up of export markets, especially with the creation of COMESA and EAC and the policies that promoted exports such as the formation of EPZs, also enabled the strongest firms to adapt to international competition and offered opportunities for the expansion that is observed today, as the next section shows.

### **The Kenyan pharmaceutical industry and its market position**

In historical studies of industrialization in Kenya, the pharmaceutical sector is rarely mentioned as it traditionally accounted for a very small share of industrial output. However, recently its status has been increasingly recognized. For example, pharmaceuticals are mentioned as one of the eighteen strategic sectors in the National Industrialization Policy 2011–15 (Ministry of Industrialization, 2010). Kenyan local manufacturers of medicines have shown great resilience during the years of economic difficulties and are now embarked on a process of growth and technological upgrading that, if successful, can establish them as a major player in the East African market for medicines.

Kenya's pharmaceutical production grew continuously from 2007 to 2013. As Figure 2.1 shows, in that period total production of tablets, capsules, liquid preparations for oral use and creams/ointments alone increased from US\$34.1 million to US\$154 million. The figure also shows that the composition of products has changed over these years, with creams and ointments becoming more popular, although virtually all product types have steadily increased with the possible exception of capsules.

Kenya has also seen strong growth in its pharmaceutical exports in the new millennium, especially since 2002. Exports started growing around 1992–93 thanks to the 'buy local' push, which promoted the expansion of local manufacturing. However, during the 1990s and early 2000s,

*Figure 2.1* Local production of non-parenteral medicines in Kenya by type of product, 2007–13 (US\$ million)

*Source*: Kenya National Bureau of Statistics, Production data for the period 2007 to 2013, Government of Kenya, Nairobi, obtained 4 September 2014. 2

local production was affected by the adverse effects of liberalization policies described in the previous section, and exports remained stable. These years also saw a wave of divestments of production activities from foreign-owned companies that carried on in the new millennium as Kenya's industrial environment deteriorated and MNC producers moved out of Kenya to lower cost platforms. By 2014, only one MNC was still manufacturing in Kenya – GSK. Otherwise, pharmaceutical firms in Kenya are currently mainly locally owned.

The great majority of Kenyan's pharmaceutical exports are destined to Sub-Saharan Africa (SSA). COMESA is the main export destination for Kenya's pharmaceutical exports, with Kenya supplying about 50 per cent of the region's production. In relative terms, however, this translates into a minute share of the COMESA market.

With respect to the main importers of Kenya's pharmaceutical products, Uganda has remained a significant market over a number of decades. Somalia and Sudan have also seen significant growth of Kenyan products, particularly over the last two decades.

In spite of the growth in production and exports, the Kenyan pharmaceutical industry has to overcome important challenges in order to consolidate and expand its influence in the East African region. Kenya's pharmaceutical industry is still mainly oriented towards the home market, with an export share of domestic production only ranging between 15 and 20 per cent, at least up to 2010. Furthermore, the Kenyan producers' share of their own home market is estimated at around 25% of domestic demand (see also Chapter 8), leaving room for expansion (Wamae and Kariuki Kungu, 2014).

Kenyan manufacturers sell to the Kenyan public procurement agency KEMSA, and to the large non-profit wholesaler the Mission for Essential Drugs Supply (MEDS) that supplies predominantly the faith-based health care sector. They also sell into the large private sector (Chapter 8). Public procurement is regulated by the Public Procurement and Disposal Act of 2005, and tendering decisions are based mainly on pricing, though a 15% price preference for local manufacturers is available. Producers and distributors are free to set their own prices and mark-ups, and private mark-ups are, on average, high. The pricing of medicines in Kenya was completely liberalized in 1993.

In the new millennium the Kenyan domestic medicines market has been hit by more global competition, notably from South Asia. A key development for the pharmaceutical industry has been the large-scale movement of donors into supplying medicines for malaria, TB and especially HIV/AIDS. This has been a strong influence on the domestic market and pharmaceutical policies in a number of the countries discussed in this book. The arrival of the large donors was, however, somewhat later and more patchy in Kenya than in some neighbouring countries. PEPFAR, for example, the main US programme for funding HIV/AIDS medication, began to operate in Kenya only in 2008, and Kenya received no funding under Rounds 8 and 9 of the Global Fund financing (UNIDO, 2010: 41).

The production capabilities of the Kenyan industry were confirmed during this period by the companies' role in the campaigning that led to the 2001 government decision to allow compulsory licensing of generic production of HIV/AIDS medicines, and the subsequent issuing of voluntary licences (UNIDO, 2010). However, private importers from South and East Asia were increasingly generating price-based competition in the Kenyan medicines market as liberalization took hold. With export figures that in absolute terms remain very modest, it is essential that Kenyan manufacturers keep upgrading and also control costs in order not only to expand its foreign markets but also to keep up with increasingly demanding technological standards and cheap foreign competition that creates a serious challenge to local producers.

# **Technological capabilities and sectoral systems of innovation**

The previous sections have shown that Kenyan pharmaceutical manufacturers are enjoying a period of growth. However they also face challenges that arise from cheap imports and the need to constantly upgrade their technology in order to keep up with global competition and increasingly demanding technical standards and to successfully exploit new market opportunities. A key factor in the future prospects of the Kenyan pharmaceutical industry is therefore the extent to which the local producers will be able to improve their technological capabilities.

The notion of technological capabilities, which has now entered the mainstream analysis of industrial development, can be traced back to the work of evolutionary economists such as Richard Nelson, Sydney Winter, Christopher Freeman and Giovanni Dosi (Dosi et al., 1988; Nelson and Winter, 1982). Evolutionary economics started as a critique of the dominant theoretical framework in economics, the neoclassical approach. The critique arose from the observation that the tools of neoclassical analysis were not well suited to the study of technological and industrial change. Neoclassical economics focuses on the working of the price mechanism in the coordination of economic activity but makes strong and unrealistic assumptions about the nature of technological knowledge and the way firms (and, in general, other economic agents) operate. Technology is seen as information, which has public good features and is therefore easily transferred between firms. Technology transfer is simplistically seen as the transfer of free information.

Evolutionary economists, however, argue that much of technological knowledge is tacit and hence difficult to articulate, let alone transfer easily. The effective use of technology requires that any publicly available technical information be processed using know-how and skills that not only are costly to acquire but also differ across firms, industries and countries. Firms and other organizations, like people, acquire skills, or capabilities, that become embedded in their procedures (also called routines) and people through a process of learning that is shaped by the history of the firm. Technological capabilities, therefore, are the organizational skills that enable firms to make effective use of technologies, including the ability to adapt them, improve them and even develop radically new products and processes. Because of their tacit nature, capabilities are costly to acquire, are learned over time and change slowly over time. An important consequence of this view is that since firms' histories and sources of learning differ, the capabilities that firms accumulate also differ. Indeed, industry studies have shown that firms within the same industry usually have many differences that are persistent over time: each firm is unique (Griliches and Mairesse, 1995).

The work on capabilities of early evolutionary economists originally focussed on advanced technologies and firms in industrialized countries. However, other scholars, such as Lall, extended this work into the context of developing countries. In an influential paper, Lall (1992) distinguished between firm-level and country-level capabilities. Firm capabilities include both investment and production capabilities and can be classified according to their degree of complexity, from basic, which involve experience-based tasks, to intermediate, which involve an element of search, to advanced, which are research-based and involve the creation of wholly new products and processes. Firm capabilities also include 'linkage capabilities', the way in which firms learn from and transfer knowledge to the external environment, that is, other organizations and institutions, including customers, suppliers, government agencies and science and technology providers. Countries also have distinctive national capabilities, which are more than the sum of the capabilities of their firms and other organizations because they also include they way economic agents interact and the features of the economic environment, such as the policies, incentives and institutions.

The early work on technological capabilities has been further developed by many scholars and has now entered mainstream thought in the field of science, technology and innovation studies (STI). A useful development of this theorizing is the recognition that industrial sectors have a set of institutions and organizations that differ across sectors and influence the way technological capabilities are accumulated and firms compete. In order to understand an industry's patterns of development and change, it is necessary to study the various agents that influence the accumulation of knowledge and the nature of competition in the industry and the way they interact.

The pharmaceutical sector is a typical example of the distinctiveness of sectoral institutions that shape technological learning and competition. Medicines are usually strictly regulated for their efficacy and safety by government agencies in a way that is unusual in other industries. The structure of demand is also distinctive because of the important role played by the state through the public procurement of essential medicines for the health system and, especially in low-income countries, the major role played by international donors in the purchase of key medicines. On the supply side, universities also play an important role as providers of skilled labour and scientific knowledge.

# **Technological capabilities in manufacturing of medicines in Kenya**

This section draws on various sources, including firm interview data, in order to give an assessment of the Kenyan technological capabilities in the local production of pharmaceuticals. The technological capabilities of the Kenyan domestic pharmaceutical sector are analysed by looking at various dimensions of the production system in which local manufacturers of pharmaceutical operate.

The analysis starts with the description of the local producers because the firms are at the centre of the industrial system. A good starting point for the assessment of the manufacturers' capabilities is the analysis of the characteristics of their products in terms of quality and technological sophistication, the extent to which they achieve industry standards and their productivity. What firms can achieve, however, also depends on the capabilities of the system of suppliers, customers, regulations and institutions with which they interact, including the educational and financial systems, so these aspects will be included in the analysis.

# **Industrial structure**

Local manufacturing of pharmaceuticals in Kenya is dominated by locally owned firms. In 2014 there were 39 local manufacturing firms with products registered with the Pharmaceuticals and Poisons Board (PPB), the agency that regulates the manufacture and trading of medicines in Kenya. Of these, 34 produced medicines for human consumption, whilst at least five firms produced animal health products. Of the 34 firms, only one producer is a foreign-owned MNC, GSK East Africa, which has not followed the exodus of other MNCs. Although MNCs dominated the local production of pharmaceuticals in Kenya in the 1990s, because of the unattractive economic conditions in Kenya in the 1990s and changes in global supply chains, most of them have moved production facilities to lower cost locations and are only present in Kenya for activities such as marketing and clinical studies (Wamae and Kariuki Kungu, 2014).

However, government policy has provided other incentives for local production by removing import duties and taxes from inputs to pharmaceutical products, such as APIs, excipients and packaging materials. The situation, however, changed in 2013 when the new VAT act reintroduced taxation for pharmaceutical inputs and only exempted finished products. This decision made locally produced medicines up to 22% more expensive, and the industry put pressure on the government to reverse the decision. This happened in the 2014 Act, but there are still some unresolved issues that are worrying local manufacturers (Wamae et al., 2014).

Studies of the Kenyan supply medicines chain show that Kenya has high margins for distributions, which raise the final price of the medicines to users in spite of fairly low manufacturing costs, in comparison to countries, such as Brazil, India, Indonesia, Kenya, Netherlands, Russia and South Africa. The study shows that the percentage of distribution costs is clearly highest in Kenya (see IMS Institute for Healthcare Informatics, 2014: 11). The high margins are a sign of the market power enjoyed by private distributors, who have a global reach and access to cheap imports, mainly from India.

#### **Products and standards**

Kenyan manufacturers are mainly engaging in activities that require basic to moderate technological capabilities, such as formulation activities, that is, converting manufactured bulk substances into final usable forms, and packaging rather than activities at the high end of the technological spectrum, such as R&D aimed at the discovery of new molecules and product development or the production of bulk pharmaceutical substances (APIs). The tablet is the most common dosage form; Kenyan firms also manufacture capsules, topical preparations (creams, gels, ointments or pastes), liquid preparations for oral use (including syrups), injectable infusions (small and large volume parenteral preparations) and ophthalmic formulations. Topical preparations have seen significant growth between 2007 and 2013 (Figure 2.1) (Wamae and Kariuki Kungu, 2014).

Formulations, however, can vary substantially in terms of the technological capabilities required for production. Products such as injectable infusions and ophthalmic formulations require sterilization, which is achieved through a production process that is technologically complex and demanding in terms of meeting standards of safety, efficacy and quality – particularly for injectable infusions. There are three local firms that manufacture injectable infusions and a few others that produce sterile ophthalmic products, including Laboratories & Allied (Wamae and Kariuki Kungu, 2014).

There are also important differences in the technological requirements within the group of non-sterile formulations. Some of the more technologically progressive firms have dedicated laboratories that undertake extensive product development activities with regard to existing products and are developing the capabilities for the production of more technologically sophisticated products. For example, some firms are moving from plain tablets to modified-release and sustainedrelease tablets. Some firms also engage in active process improvements. Some producers already meet WHO-GMP standards, and are also upgrading their production processes to gain WHO recognition, which could possibly open the door to funding by international donor agencies. One company, Universal Corporation, has already received WHO prequalification for its Lamivudine/Zidovudine anti-retroviral product in 2011, and other firms, such as Cosmos, are aiming to gain pre-qualification in the near future. Other firms are attempting to gain GMP standards with the help of PPB and international agencies such as UNIDO (UNIDO, 2014).

Formal R&D activity (the discovery and product development of new active pharmaceutical ingredients) is in its infancy, with only one firm engaging in R&D. Another firm, Botanical Extract EPZ (or BEEPZ), is the only Kenyan firm developing capabilities for the production of artemisinin, which is used in the production of anti-malarials. BEEPZ is the development of an industrial concern born in 1996 in Tanzania to develop the production of high-quality *artemisia annua* with improved yields and artemisinin content. The project expanded its facilities to produce the raw materials in Kenya and Uganda, and in 2007 BEEPZ commissioned its principal processing facility in the export processing zone (EPZ) in Athi River, Kenya, currently producing non-API-grade artemisinin for export (Botanical Extracts EPZ, 2015). The expansion of production of *artemisia annua* to Kenya and Uganda was possible thanks to grants from the UK Department for International Development (DFID) and the multinational company Novartis, a leading producer of artemisinin-based anti-malarial drugs, which also became a BEEPZ customer in 2009, when the EPZ plant started production (IRIN News Africa, 2015).

There are also three local firms that process some raw materials that are used to manufacture bulk pharmaceutical products. These raw materials are 100% destined for export, as the local capacity for manufacturing active pharmaceutical ingredients remains underdeveloped.

#### **Productivity, capacity utilization and cost efficiency**

Unfortunately, it is too difficult to obtain a direct measure of productivity for the various manufacturers, but it is well known that capacity utilization is an important determinant of productivity. Firms that only operate at a low level of capacity utilization are less efficient and can only achieve relatively low levels of productivity.

Annual capacity utilization for the manufacture of most dosage forms averages around 60%. Only injectable infusions experience higher capacity utilization ranging between 85 and 100%. A number of reasons have been identified from interview data. These include: the functioning state of machinery and equipment; delays in sourcing spare parts from abroad and specialized maintenance support from machinery and equipment suppliers; human resource issues and in particular highly specialized skills in some critical areas such as product development; perceptions of locally manufactured products by some market segments; and lack of policy coherence (Wamae and Kariuki Kungu, 2014). Some of these challenges have a direct impact on the competitiveness of locally manufactured products.

The interesting observation is that these factors seem to apply mainly to the supply side of the industry. In other words, limited capacity utilization does not seem to be due to lack of demand. The previous sections showed that local producers only supply a quarter of the domestic market and a very small fraction, less that 1%, of the COMESA medicines market, so there are plenty of opportunities for expansion. Indeed, Kenyan local manufacturers have the twofold challenge of having to increase capacity utilization and very importantly considering options for expanding their total capacity.

On the other hand, once the segments in which local producers operate, which are mainly fairly unsophisticated formulations of essential medicines, are taken into account, it is possible to see that Kenyan manufacturers operate in a very competitive sub-section of the market with many competitors, both domestic and importers, and where prices and therefore profit margins are low because of the low purchasing power of the consumers and the inability to access funding from donors because of lack of WHO prequalification (UNIDO, 2012). So the technological limitations of the manufacturers also contribute to relegating most of them to a narrow and highly competitive segment of the industry where demand for each firm's product might well be constrained in some cases.

#### **Human resources and the educational system**

Successful industrial production requires a range of different skills. Local universities, such as Jomo Kenyatta University of Agriculture and Technology, Mount Kenya University and the University of Nairobi, provide graduates with good-quality basic skills and training in pharmacy, engineering and chemistry. Top polytechnics such as the Kenya Medical Training College are good sources for mid-level training. Employees also use foreign universities, for example in the UK, Germany and India. All firms also have compulsory training in-house. However, the internal education system cannot meet all industry requirements, especially as upgrading is needed.

Official reviews (UNIDO, 2012) and interviews suggest that there is a scarcity of pharmacists specialized in industrial pharmacy. The educational system has a high literacy rate and provides people well qualified in clinical pharmacy, but newly qualified employees need extensive training in the industrial aspects of drug production, including specialized training in industrial quality assurance. A key issue is that the teachers were originally trained in clinical pharmacy, so there is not a long tradition of industrial pharmacy in Kenya. University graduates have a good training in basic skills and theory, but many firms make use of training programmes run both internally and externally by international organizations, such as GIZ, Action Medeor and UNIDO. The latter sponsors popular courses such as the industrial pharmacy advanced training course run in Tanzania at the Kilimanjaro School of Pharmacy with the support of US universities (UNIDO, 2015).

Firms use some local training institutions, both public, such as the Kenya Medical Research Institute (KEMRI) and the PPB, and private. For advanced skills, however, they need to bring in experts from abroad, usually from India but also from other countries. Expatriates are expensive but important for quality because they have rare skills and experience in industrial processes. Usually they are offered shortterm contracts (two to three years), possibly renewed once but usually not longer because of permit limitations and because new people tend to have more up-to-date skills. Foreign experts are identified through various channels, such as suppliers, agencies, the Web, competitors and international agencies.

Finally, in some cases firms also use their informal networks to send employees to be trained abroad, with India being a popular destination because of the strength of the Indian pharmaceutical industry. So local manufacturers seem to be able to rely on solid internal supply of skills, although at a fairly basic level, and to access expertise at a global scale even though the latter is subject to intense scrutiny because of its high costs.

#### **Equipment and inputs**

The shallow level of the Kenyan industrial sector is an important factor when inputs to production and equipment are considered. Kenya's industry is one of the most developed in East Africa, and local producers can find local suppliers for basic inputs including packaging, with the exception of some more advanced packaging for sterile products, which is procured abroad, for example from China. Some more technologically complex packaging, such as over-pouches for injectables, used to be imported but are now produced locally.

Raw materials for production are mainly imported, due to the lack of producers of APIs and excipients. This dependence on imports is an important issue because it generates possible shortages which might influence production capacity, and additional costs even though pharmaceutical inputs are supposed to be exempted from duties. In addition, Kenyan firms compete with imports produced by vertically integrated companies who also produce APIs, and are likely to price this key ingredient above the competitive level.

Kenya does not have a developed industrial machinery sector, so the main machinery is imported from international suppliers. A popular source of equipment for pharmaceutical production is India followed by China, although language can be a barrier. India's machines have the advantage of being significantly cheaper than those from industrialized countries and basically do the work well enough for tasks that do not require a high level of technological sophistication. Europe (especially Germany and Italy) and other high-income countries are the sources of more advanced and reliable machinery. The choice of suppliers is sometimes dictated by financial considerations: higherquality machinery might be not only more efficient but also more profitable in the long run. Companies, however, lack the resources for a high upfront investment in European machinery, in spite of the fact that the financial sector in Kenya is the most developed in East Africa.

The dependence on imports of machinery creates additional costs for local firms. Spare parts attract additional costs because imported products need to be checked and to obtain a quality stamp according to rules of the Kenyan Bureau of Standards. Additional inefficiencies are also created by the lags that occur in decisions during the process of import.

Machines are operated by local engineers, who also keep records for GMP inspections, and are usually installed by suppliers who offer a comprehensive package of support including training and maintenance, at least for the first few years of life of the machines.

Some companies are currently looking to automate their production processes. Reduction of labour costs is one of the reasons, but improvement of quality and productivity and reduction of human error and exposure in handling are more important factors.

## **Knowledge flows, linkage capabilities and innovation**

As explained above, capabilities at the industry level depend not only on the capabilities of the various economic agents, such as manufacturers, but also on how effectively the various components of the industrial system interact and promote flows of knowledge. This section, therefore, looks in more detail at the flows of knowledge in the system and how these influence the accumulation of capabilities within firms.

Medicine producers develop their capabilities by acquiring knowledge from the external environment and through experience accumulated through a process of learning-by-doing over time. An important input to the firms' capabilities comes from the education and training activities of its workers, as discussed above. Firms, however, can step up their accumulation of knowledge by explicitly investing in learning. This can happen internally through formal or informal research activities and by acquiring knowledge from other firms – suppliers, customers and even competitors – or research institutions. Most of the firms interviewed mentioned the importance of suppliers as sources of useful knowledge. Suppliers regularly train manufacturers' employees to use their machinery. Furthermore, by coming into contact with many different firms, suppliers gain useful knowledge about the industry and can be used as sources of technological knowledge or to identify people and firms with specific expertise that is useful for a company. Since Kenyan firms use foreign suppliers, they have been able to tap into their suppliers' knowledge networks in order to identify foreign experts to hire, good training programmes and foreign firms where they can send their employees to learn more about advanced industrial technologies: some firms, for example, have mentioned examples of employees sent to be trained in Indian firms.

As mentioned above, firms also gain valuable knowledge by hiring international experts from countries such as India, South Africa and even European countries. Hiring expatriates and sending employees to train abroad are expensive investments, so firms have schemes in which the trained employees relay the knowledge learnt to their colleagues.

As the innovation literature has pointed out since the work of Von Hippel, firms also learn from the users of their products (Von Hippel, 1982). Some producers have stressed the importance of the feedback collected by their marketing teams. A firm selling sterile injectable products stated that important knowledge was learned from nurses who used their products, and changes were implemented following the nurses' feedback.

Other common channels through which firms learn useful knowledge are exhibitions (also abroad), websites, membership of professional associations and conferences. Manufacturers also learn from each other because employees move between firms or meet and have informal exchanges at training events and seminars. Flows of knowledge also occur through the industry associations, the Federation of Kenyan Pharmaceutical Manufacturers (KFPM) and the Federation of East African Pharmaceutical Manufacturers (EAFPM), which organize training events and other initiatives.

Regulatory agencies also provide firms with valuable knowledge. For example, PPB does not only carry out inspections but also helps manufacturers with advice, especially on issues relating to the acquisition of the GMP standard, including documentation relating to the audits, and on Good Laboratory Practice and Good Distribution Practice. Similarly, the National Quality Control Laboratory (NQCL) offers training and knowledge transfer in the areas of drug testing and medical instrumentation, and Kenya Medical Research Institute (KEMRI) collaborates in the areas of research and training (KEMRI, 2015).

#### **Licensing and joint ventures: the role of government policy**

As the previous section has explained, the accumulation of technological capabilities occurs over time, and the current capabilities are influenced by past events. Because of the cumulative nature of technological knowledge, policy initiatives can have a long-lasting impact on the capabilities of firms and industries. In the Kenyan case, there are two examples of policy intervention that can be said to have helped the development of technological capabilities in the industry: the provisions for compulsory licensing in the Trade-Related Aspects of Intellectual Property Rights (TRIPS) negotiations, and the policy of forming parastatal joint ventures with foreign MNCs in order to develop local capabilities based on foreign technology.

In the case of licensing of foreign technology, Kenya campaigned vigorously during the trade negotiations that led to the TRIPS agreement in order to be able to carry out compulsory licensing for some essential medicines. Compulsory licensing means that governments can issue licenses to manufacture medicines that are still protected by patents at more affordable prices than those set by foreign pharmaceutical companies that hold the patents, without receiving the latter's consent. Although in practice there has been no compulsory licensing in Kenya, it can be argued that the threat of compulsory licensing has enabled local firms to reach good licensing agreements with foreign MNCs. According to Garwood (2007), 'Kenya has never issued a compulsory license, but came close to in 2004 before the German pharmaceutical major Boehringer Ingelheim agreed to enter into a voluntary license agreement with Kenyan drug firm Cosmos to produce generic versions of its patented anti-AIDS drug nevirapine'. Cosmos went on to enter another technology transfer agreement with Roche and is now one of the most dynamic Kenyan manufacturers, also aiming to gain WHO prequalification for the production of ARVs. The 'buy local' drive or procurement approach of the 1990s was also significant. It helped to lay a strong basis for the mushrooming of private local manufacturers: thus Cosmos would probably not have had its advantageous licensing position were it not for the 'buy local' move that was in effect very much steeped in ISI thinking.

As the above historical background pointed out, during the import substitution period, the government established ICDC to promote the development of local capabilities partly through parastatal joint ventures with foreign organizations. Joint ventures formed through the 1970s with the Yugoslav government and a German firm are now the precursors of two dynamic Kenyan private firms: Dawa and Infusion Medicare, one of the producers of injectables. Cosmos was also originally formed as a joint venture. Now all three firms are wholly locally owned private firms, and critics of import substitution and ICDC interpret the fact that the joint ventures had to be privatized as a failure of import substitution and ICDC (see, for instance, Himbara, 1993). However, it can be argued that although the parastatal status might have hindered the business development of the joint ventures, ICDC can still be said to be responsible for the creation of organizations that developed local technological capabilities that were later further developed by private capital. Possibly, without the initial policy of forming joint venture, companies like Dawa, Infusion Medicare and Cosmos would not exist today.

The ISI policy involving joint ventures, of course, is not the only way to build industrial capabilities. In more recent years, Kenyan firms have found other ways to draw successfully on foreign capabilities. Two other producers of sterile products followed different strategies: one, facilitated by the assurance of a large government procurement, bought a South African firm outright and transferred the facilities to Kenya, whilst the other, which pursued an export-oriented strategy and is located in an EPZ, assembled a variety of suppliers and contractors to build a new plant with equipment sourced from various countries and drawing on international expertise.

#### **Conclusions**