When GSK’s CEO Emma Walmsley took over office from Andrew Witty in 2017, her strategy was clear; to create a more competitive operating model for the company’s business in emerging markets.
A move, at the time, expected to affect 29 countries in sub-Saharan Africa.
Fast forward to 2022/2023 GSK officially announces that it will cease commercialization of its prescription medicines and vaccines in Kenya and Nigeria. In the statement, the global powerhouse stated that it would outsource the logistics part of its business through a third-party direct distributor-led model.
For Nigerians in particular, this came as a shock considering an estimated 160 employees were expected to lose their jobs. And at the same time, the government would be losing a taxpayer who has been carrying out business in the country for over half a century.
A year later after the announcement and Bayer seemingly is following suit.
Only last month, the German company announced that later this year, it will also be transitioning to a third-party distributor model.
The company has contracted an unnamed logistics company that will be taking over its warehousing, distribution and sales functions in Kenya, Ethiopia, Nigeria and Ghana.
Although it’s still unclear how big an effect this will have in these countries, one thing is for sure, a fair few number of jobs are vulnerable.
Which brings us to the question;
After operating in the continent for decades, what could be the driving force behind ceasing operations? And is it necessarily a bad thing?
Why Bayer and GSK turned to a distributor-led model?
In a move that hasn’t been unique to the pharmaceutical industry, global corporations have been making a strategic shift towards outsourcing the non-core functions of their businesses.
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Not too many years ago, Reckitt Beckinser cut down operations in both Kenya and Zimbabwe, citing rising cost of production, struggling economies and a business environment classified as unfavorable.
Pharmaceutical companies are facing the same quagmire.
A few months ago, a GSK spokesman attributed the company’s exit from Nigeria to an inability to access foreign currency.
The dollar to be specific.
This, as he said, had far-reaching ramifications. Global pharma companies operating in the continent need to have solid dollar cash flows to be able to import raw materials as well as repatriate revenue earned in these African countries.
In the last 5 years alone, the Naira has diminished in value from 361 to 1250 (as at 5th Feb 2024) in relation to the dollar. This means revenue earned in the local currency loses a significant portion of its value immediately the company elects to import more raw materials to aid production or take money back to their home countries.
European global pharma corporations have also had to deal with fierce competition from Indian and Chinese pharmaceutical companies that are able to supply the continent with generic medicines at a fraction of the cost of the brand alternatives.
Consequently, companies like GSK and Bayer have had to rethink their strategies so as to retain and even expand their current market share.
With skyrocketing costs of production, these companies have found it difficult to maintain affordable prices. A situation that spells irony considering the end goal of pursuing local production was to avail medicines at a more affordable unit cost to the continent.
Electricity price in Kenya has for example ballooned by 63%. This, accompanied with a raft of increased taxes; doubling of VAT on fuel, introduction of housing levy, increase of statutory deductions, makes it almost untenable to manufacture locally.
Security concerns, political instability and uncertainties around policies are other reasons why pharma companies may be ceasing operations and migrating out of the continent.
So, is outsourcing necessarily a bad thing?
Well, short answer; no.
Outsourcing is neither nothing new nor always a sign of impending doom.
As far back as the 1970s, manufacturing companies used to contract outside firms to manage their non-core processes with the overall goal of improving efficiency. In fact, research has shown that outsourcing can improve productivity and competitiveness 10- to 100- fold.
Contracting out non-core functions of a company is therefore not solely about saving costs, it is a key strategy that some say will power the 21st century global economy.
Benefits of outsourcing
Ceding control of logistics (warehousing and transportation) function allows companies like GSK and Bayer to focus on what they do best; research, development and manufacture of medicines.
The contracted company whose core competency is distribution, is more likely to deliver more efficient services as compared to the pharmaceutical-focused companies.
With the change in strategy to outsourcing, it is natural selection that the workforce would inevitably lose their jobs and would need compensation for their release – costing companies millions of dollars.
This would not be the case if the company had outsourced to a third-party logistics provider.
There is more human resource flexibility.
A company like GSK for example, would find it easier to contract or drop a logistics company for its functions rather than going through the processes of human resource hiring and firing.
Risks of outsourcing
A pharmaceutical company that elects to handover its logistics functions to a third party has essentially given up control of one of its important business component.
Depending on the structure of the contract the company may find it difficult to be fully involved in crafting and implementation of the distribution strategy.
In most cases when a logistics company is contracted to take over the distribution aspects of the business, they in most cases, do a great job. However, there are those odd scenarios where the contracted company, for one reason or another could be less efficient than the pharmaceutical company.
Not understanding the concept of outsourcing, clients may perceive this as a drop in performance of the parent company therefore resulting in loss of business.
Conclusion
As seen, the decision to transition to a third-party distributor led model, whether calculated or forced, has its strong points and is not averse to risk. It is not unfathomable that more global pharmaceutical companies will decide to adopt the same strategy.
Is it a good thing or a bad thing?
Context provides more clarity on where the answer lies.
But we can’t hide the fact that rising operational expenses, economic downturns, security concerns and questionable policies are hurting the African pharmaceutical business environment.
With continental efforts shifting more towards self-reliance in terms of increased local production of health products. Big companies migrating out of the region due to unfavorable business conditions does not spell good tidings.
Therefore, a lot still needs to be done to make the pharmaceutical business environment conducive for the industry to thrive within the continent.
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About the Author
Bevin Likuyani is a Pharmacist with a MPharm (Pharmacoepidemiology & Pharmacovigilance) and MBA (Strategic Management) from School of Business, University of Nairobi). He is a Certified Supply Chain Pharmacist. (American Association of Supply Chain Management) and content writer on pharmaceutical related topics. Email: bevin@africanpharmaceuticalreview.com LinkedIn
