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Private equity firm discusses Ethiopia pharma investment

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UK-based private equity firm 54 Capital today announced it has entered Ethiopia’s pharmaceutical market through an investment of US$42m into Addis Pharmaceutical Factory (APF). According to the firm, an initial investment of $30m, with the option to invest a further $12m, will be used to increase APF’s national and international reach.

How we made it in Africa asked Nathalie Bennett, investment associate at 54 Capital, why the firm decided to invest in Ethiopia’s pharmaceutical industry.

What was the main motivation for this investment?

We already have a strong base in Ethiopia, with some of the team having more than four years’ experience through our investments in the FMCG sector (we have several investments including water bottling, pasta and flour, and edible oil production). From these we have gained a high degree of understanding in terms of manufacturing, selling and distribution.

We wanted to build upon this experience to expand and apply it to another sector that we have always had an interest in. We believe there is a huge opportunity for growth in terms of pharmaceutical investment. We also have a lot of confidence in Ethiopia as a country, and the government has highlighted in their most recent Growth and Transformation Plan a focus on the development of the private sector, within which they want pharmaceutical manufacturing to be a priority area.

When we first visited APF we were impressed by the facilities and the ambitious management team who have really driven the company forward these past few years, and who have long-term goals which, together with our investment, they will be able to realise.

Tell us about the products that APF manufactures.

APF manufactures a wide range of products which are today primarily serving the public market, many of which are antibiotic-based medicines. The Adigrat (situated in northern Ethiopia) plant produces 70 types of medicines under seven major categories, while the smaller plant in Addis Ababa produces injectables.

Describe the growth opportunities in Ethiopia’s pharmaceutical industry.

Ethiopia has the second largest population in Africa and the market itself is expected to increase about 15% per annum over the next three years to reach a total value of $1bn by 2018 versus 10% growth across Africa.

Among local manufacturers, there are a number of internationally-backed companies who have expansion projects underway, but are either concentrating on other segments of the market or much smaller than APF.

In terms of imported products, local manufacturers actually have an advantage over imports. As previously mentioned, the Ethiopian Government is keen on reducing import bills and therefore prioritises and protects local manufacturers, with a target to increase their market share in tenders from about 20% to 50% by 2020 and 60% by 2025. This will take the form of a significant growth (30%-plus) of the tender market opened in priority to local manufacturers.

How did this deal come about?

From our inception as a company, our chief investment officer, Saad Aouad, had already identified the pharmaceutical sector as an area we would like to become involved in, and after research it was clear APF would be an ideal company to partner with. We established a relationship with APF last year through EY Ethiopia, and it quickly became clear to us that the company had a strong and driven management team whom we worked well with, and where we could see a lot of value creation through an investment.

What are the biggest risks associated with this investment?

With any investment into emerging markets there are always risks to some extent. These can include inflation, competition as well as timing to get projects online, which can sometimes take longer than expected. However, we are confident we can either avoid or work with these in order to ensure they have minimal to no impact on our operations. The central bank has done well to manage inflation since the high rates witnessed in 2011, by taking a number of strong fiscal and monetary measures to get the situation under control.

Of course, delays in project timing can be problematic – we do not want to be in a position where we do not deliver on projects we have told our investors would be complete within a certain time. However, the fact that we have an extremely strong on-the-ground presence, as well as very good relationships with our local partners, means this is unlikely to happen.

Within our portfolio companies in the FMCG sector we have already been able to get new lines operational and production started within short time frames and are confident that alongside our international experts, we will be able to replicate this same success at APF.

What are the benefits of manufacturing pharmaceuticals locally in Ethiopia, as opposed to importing?

Let’s look at other countries, which are 10 to 15 years ahead of Ethiopia in terms of the maturity of their pharmaceutical markets, such as Egypt, Algeria, Morocco or Tunisia. In all of these countries we can see that early on the government has put in place incentives for local manufacturing to build capability and capacity. Subsequently, they have reduced imports as local demand picked up. This has ensured strong local supply, created employment and competitive pricing.

As these markets matured, a handful of local players ended up sharing the top 10 rankings with multinationals, where local players covered the middle and lower tiers, and multinationals the top tier in terms of pricing. Typically those locally-branded generic operators which emerged in leading positions were the ones most able to build strong brands based upon product quality, high-capability sales forces with country-wide coverage and, not least, the ability to launch new products every year to address all key patient needs. It can only be good for Ethiopia to have its own local pharmaceutical player.

How involved will 54 Capital be in the day to day running of APF?

We have put a strong team of international experts in place who will be based either full time or part time at the plant, and will be involved in its daily running together with the local management team, especially during the early stages of our investment. As with our other deals, the entire team will be involved as we have taken a hands-on approach to our other investments in the country to date.

By when do you plan on exiting this investment?

Our typical deal lifespan is between 5 to 7 years.

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