Bahrain beckons Indian Pharma

Willingness to increase private participation in the local pharmaceutical manufacturing sector and structured approach to investment has strengthened Bahrain’s position as an attractive investment destination By M Neelam Kachhap

The Kingdom of Bahrain is an archipelago of 40 islands in the Middle East, located in between the Persian Gulf and the Gulf of Bahrain and close to the Kingdom of Saudi Arabia and Qatar. With a total area of 735.8 sq km, Bahrain is home to 1.3 billion people half of which are expatriates. Manama (the capital) and Muharraq are the main areas among the five main governorates in Bahrain.

Over the past century, Bahrain has been at the helm of trading through oil exploration, finance and education. The Kingdom of Bahrain enjoys the reputation of being the centre for financial services in the Middle East backed by the strong regulatory framework for the industry. In fact, Bahrain’s main investment sectors are financial and banking services but its economy continues to depend on petroleum production and refining. They that account for 25 per cent of its GDP. Other major economic activities are heavy industries, retail and tourism. Bahrain launched Economic Vision 2030 with the vision to transform Bahrain from an economy based on oil wealth to an economy that is globally competitive and sustainable, which provides a higher standard of living for the people of Bahrain. The Bahraini government has targeted five industries for expansion for the purpose of achieving overall stability. These areas include business and financial services, tourism, information technology, telecommunications and healthcare.

Healthcare scenario

Bahrain’s healthcare system is modern, technologically-advanced and comprehensive. The quality of life and other healthcare indicators have raised Bahrain’s status above its other Gulf neighbours and it is considered as one of the healthiest countries in the region. Bahrain has managed to control communicable diseases and reach almost 100 per cent in its immunisation coverage of basic vaccines. However, Bahrain is witnessing a continued rise in the chronic non communicable diseases such as cancer, cardiovascular diseases and diabetes. These now are the major causes of death in the country.

Pharmaceutical market in Bahrain

Bahrain’s pharma market has a lot of potential. The most obvious thing about the Bahraini pharma market is that the domestic production of drugs is small and market demand is almost entirely met through imported pharma products.

“The pharma sector is still an emerging industry in the GCC, and drug manufacturing is at a relatively nascent stage due to limited focus on developing indigenous production capabilities, restricted allocation of funds towards research and development, and shortage of skilled manpower,” says Sanjay Vig, Managing Director, Alpen Capital (ME), UAE.

However, Bahrain is trying to attract companies looking to set up regional offices, manufacturing hubs or research and development facilities in the country, given its strong regulatory framework and relatively stable political and economic environment.

“Although size of the pharma market in Bahrain is the smallest in the GCC in absolute terms, the sector’s contribution to GDP (0.6 per cent) is largest among all the regional counterparts,” informs Vig. “The country also ranked second in the region in terms of pharma sales per capita, which was $226 in 2012. According to estimates, the pharma industry was worth $260 million in 2012, compared to $240 million in the previous year,” he adds.

This may not be a remarkable thing but the fact that the pharma sales in Bahrain are experiencing a surge may have some bearing on the companies interested in investing here. Besides, the huge demand for branded drugs and strong spending capacity points toward positive prospects for exporters who aim at entering this market. Branded drugs dominate the market, with generic drugs sales lagging behind. A huge chunk of the market is served by traditional medicines as they are still in demand in the country, and there are a number of companies making herbal pseudo-pharmaceuticals.

Drugs are very expensive in Bahrain but a strong spending capacity and increasing health awareness coupled with the general perception of branded drugs being superior to the generics; tilts the scales in favour of branded drugs. Thus prescription drugs rule the market, however, OTC products and pseudo-pharmaceuticals like weight loss products, vitamins, and probiotics are gaining attention lately. Visibility of OTC drugs, especially branded products, available widely at pharmacies, supermarkets, and specialist stores are the main cause of growing sales. Encouraging the use of generic drugs, the government has allowed patients to claim reimbursements on prescriptions of generic products.

Market outlook

Experts believe that Bahrain’s pharma market will experience sustainable growth in the medium to long term. Increased domestic production, foreign investments, and consumption of generics will be the key driving force in the market’s evolution. “The GCC pharma market is projected to expand at a CAGR of six per cent to eight per cent between 2010 and 2020, with the pace of industry expansion in Bahrain projected to outpace the regional growth. Increased domestic production, foreign investments, and consumption of generics are likely to support the market’s evolution,” says Vig.

According to www.marketresearch.com, the per-capita spending on pharma in Bahrain is expected to almost double in the next ten years to 2021, from some $182 calculated for 2011. This growth will be driven by the expanding population, increasing consumption of medicines, government programmes targeting non-communicable diseases, significant expansion of healthcare facilities and the growing cost of medical imports.

Key challenges

As elsewhere, Bahrain also has some challenges which must be overcome by Indian investors to have a successful business. Some of the key challenges while looking at Bahrain are the unavailability of information, financial risks, inadequate overall market information and price controls. Besides, the investors also get intimidated by the tough registration process in GCC countries. “Lack of focus on the development of a manufacturing sector in the GCC until a few years back, small domestic market size, difficulty in raising adequate funds, and shortage of knowledge and skilled manpower are some of the major factors that restricted flow of investments into the pharma manufacturing sector,” says Vig. These could be addressed by industry bodies like The Economic Development Board (EDB). The agency acts as a matchmakers and works closely with investors to help identify potential opportunities in Bahrain. EDB’s investor relations officers assist and guide investors through the process of establishing their company in Bahrain. The licensing and operational process begins with finding a relevant business activity for the investor followed by retrieving the required approval from the sector-related regulators.

Setting up a pharma manufacturing unit is highly capital intensive and typically involves a long payback period. The Gulf countries are highly dependent on imports of manufacturing equipment, pharma ingredients, and medicines for end use. This makes the pharma industry in the GCC vulnerable to supply-related problems and fluctuations in foreign exchange rates. Regional drug prices are significantly higher than the world average, which may prove detrimental for the overall progress and long-term growth of the industry in real terms. Further, prices vary significantly within the region.

Existing players

Although Bahrain did not have a single mainstream pharma manufacturer operating in 2010, the country is gradually witnessing some development within the local manufacturing segment. Major investments are done by companies looking to set up regional offices, manufacturing hubs or research and development facilities in the country. In the later part of 2011, Bahrain Pharma (previously known as Bahrain International Medicine Manufacturing Company) announced its plans to construct the nation’s first pharma factory at Bahrain. The company operates as a contract manufacturer of nutraceutical and pharma products with equipment and technology provided by the US-based Vanguard Pharmaceutical Machinery. In order to reduce its reliance on imported medicines and boost growth of the local pharma manufacturing industry, the government of Bahrain is encouraging foreign capital flow and private sector investments into the industry. SBI Pharmaceuticals, a part of the Japanese conglomerate group, SBI Holdings, was reported to be planning to open a manufacturing facility in the country. The company identified Bahrain as its research and development base in the MENA region and also set up a representative office in the country recently. Bahraini companies such as Innovest and Bahrain International Medicine Manufacturing Company are also establishing their presence in the domestic manufacturing segment. Indian pharma firm Aurobindo Pharma launched Bahrain operations in 2012.

Attractive investment destination

“Fast growth in the GCC offers a wealth of opportunity for Indian healthcare providers. Our markets have a combined value of $1.5 trillion, expected to reach $2 trillion by 2020, and have increasingly sophisticated mass-affluent populations on the lookout for cutting edge medical technologies and treatments.” Kamal bin Ahmed Minister of Transport and Chief Executive, Bahrain Economic Development Board

Bahrain, the ‘Gateway to the Gulf”, maintains a liberal and trusted business environment and boasts unrivalled access to the markets of the Gulf Cooperation Council (GCC) comprising Bahrain, Kuwait, Oman, The kingdom of Saudi Arabia, Qatar and the United Arab Emirates. “Fast growth in the GCC offers a wealth of opportunity for Indian healthcare providers. Our markets have a combined value of $1.5 trillion, expected to reach $2 trillion by 2020, and have increasingly sophisticated mass-affluent populations on the lookout for cutting edge medical technologies and treatments,” says Kamal bin Ahmed, Minister of Transport and Chief Executive, Bahrain Economic Development Board.

Tax heaven

Bahrain reportedly has one of the most favourable tax regimes in the world with no corporate tax, no personal tax, no capital gains tax, no withholding tax and no restriction on the repatriation of capital, profits or dividends. “Bahrain offers an attractive and supportive business environment, including competitive tax rates, transparent regulation, excellent transport connections by air, sea and road to the other countries of the GCC, and a highly-skilled local workforce, making it an ideal platform from which to access the GCC market,” says Ahmed.

Bahrain also has a free trade agreement (FTA) with the US that Indian manufacturers can take advantage of, particularly as India and the US do not currently have a FTA in place points out Ahmed.

The Kingdom is also negotiating an FTA with India which may take shape soon. “The countries of the GCC, which include Bahrain, Saudi Arabia, Qatar, UAE, Kuwait and Oman, and India are currently negotiating a free trade agreement which it is anticipated will be completed in the near future,” informed Ahmed.

Competitive costs

The overall cost of doing business in Bahrain is also comparable to the other locations in the GCC. Be it renting office space or the cost of land or the cost of electricity Bahrain is very competitive. Thus the investor has an advantage in not just taxation but in overall cost of doing business. In this regard the free trade zones established in Bahrain are instrumental in attracting foreign investments and technology required to build local capabilities for manufacturing of patented pharma products.

Bahrain International Investment Park

The Bahrain International Investment Park (BIIP) is a business park catering to companies looking to establish export-oriented manufacturing and international services operations in the Middle East. “The Park is positioned as a location for high quality foreign direct investment in Bahrain, offering a tax free location with full duty free access to GCC markets. This exclusive Middle East business park, with its advanced facilities and special customs services, offers businesses an unsurpassed base with direct connectivity to the very heart of regional markets,” says Paddy Gallagher, Marketing Manager, Bahrain International Investment Park.

BIIP is a high quality 247-hectare business park that has been developed by the Ministry of Industry and Commerce. The Park has excellent connectivity and access to both the Bahrain International Airport and the new Shaikh Khalifa Sea Port in Hidd. The BIIP enjoys direct motorway access to Saudi Arabia, via the 25 km Saudi-Bahrain King Fahd Causeway and will enjoy the same connectivity to Qatar via the Qatar-Bahrain Friendship Bridge.

“The Park extends 2.5 million sq m, and as of October 2010, 70 per cent of the space had been allocated to 77 companies, of which 37 are foreign. These companies will create 8,000 jobs,” says Gallagher. “Companies operating from the Park include Kraft Foods (US), BASF (Germany), Siemens (Germany), S+A Abahsain (Saudi Arabia) and MTQ Corporation (Singapore),” he adds.

Bahrain-India trade relations

Continuous growth and prosperity mark the Bahraini –Indian trade relations, wherein the non-oil imports from India have reached $395 million while its exports have reached $835 million. Several MoUs and agreements have been signed since 2012 amongst them is a tax information exchange agreement for joint investments between the two countries. In addition to signing an MoU between the Bahrain Chamber of Commerce and Industry and the Indian Industrial Union to strengthen the trade and industrial benefits exchanged, and also the establishment of the Indian Bahraini Business Council which aims at developing the economic, trade and technologic relations between Bahrain and India.

Bahrain’s allure is strong. Low costs and minimal taxes are very lucrative to the Indian pharma industry. Large saturated markets of the US, Europe and Japan have forced the pharma companies to look for other emerging markets and Bahrain fits the bill.

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(The author visited Bahrain recently on the invitation of The Bahrain Economic Development Board)