Dominican Republic: A Hidden Manufacturing Gem

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The rise of the Dominican Republic as a regional medtech manufacturing hub might have come as a surprise to many, but not to the insiders and executives of the Central America & Caribbean healthcare industry. With several decades of economic growth and political stability, the country has positioned itself as more than a paradisiacal tourism destination. Today, the Dominican Republic is racing to improve its healthcare system, leveraging its local-dominated pharma industry, the largest market in the region with over US 700 million in size, and betting on its strong trade relationship with the United States and geographical position to become a logistics hub.

 

While less well known than neighbouring Cuba, Puerto Rico, and Haiti – with which it shares the island of Hispaniola – the Dominican Republic has much to recommend it. Christopher Columbus first explored and claimed Hispaniola in 1492 and it later became a springboard for the Spanish conquest of the Caribbean and the American mainland. After more than 300 years of Spanish rule, the Dominican Republic attained independence in 1844.

Unlike many other nations in the region, the Dominican Republic has enjoyed almost 60 years of political stability. This began after the United States led an intervention amid a civil war in 1965, since which uninterrupted democratic elections have been held.

The country also boasts an enviable economic growth story. While not the region’s largest country in size or population, it does however boast its largest economy. From 1992 to 2018, it was the fastest-growing economy in the Western Hemisphere with an average real GDP growth rate of 5.3 percent.

This growth dates to the 1980s, when the Ronald Reagan administration implemented the United States’ Caribbean Basin Initiative (CBI), giving countries in the region unilateral access to the US market. A free trade agreement with the US and Europe followed, making the Dominican Republic an increasingly attractive manufacturing destination.

Like neighbouring Puerto Rico, the Dominican Republic has emerged as a significant player in medical device manufacturing. As the country transitioned away from exporting raw materials, it has burnished its footprint in this field, and now stands as a direct competitor to its more storied neighbour.

 

A medical devices island to rival Puerto Rico?

Not too long ago, medical devices manufacturing in the Americas meant Puerto Rico, an island-nation that, propelled by US tax incentives and regulatory protection, became the place to be if a manufacturer’s destination was the lucrative US market. Today, while maintaining a vast medical devices production, Puerto Rico’s golden age appears far gone as competition continues to rise.

Fewer than 300 miles away from the Island of Enchanment, with a slow and steady approach that spans four decades, the Dominican Republic has been gaining ground, recently being called The Island of Medical Devices. The first medical device factories were installed in the country in the mid-1980s, in order to assemble and package products, while the more complex processes were done in places like Puerto Rico.

“It has been a gradual transformation that followed basic market dynamics, but it all began with the CBI, a United States program that aimed to provide several tariff and trade benefits to many Central American and Caribbean countries,” explains José Manuel Torres, executive VP for ADOZONA, the Dominican Association of Free Zones.

That evolution was accelerated with Section 936 of the US Internal Revenue Code that gave Puerto Rico fiscal advantages and benefited the Dominican Republic with the creation of joint ventures in manufacturing. Medical devices manufacturers operating in Puerto Rico began doing tech transfer to the Dominican Republic and stayed in the latter after the tax credits of Section 936 expired.

Companies with manufacturing operations in the Dominican Republic today include Medtronic, Johnson & Johnson, Cardinal Health, B Braun, Beckton Dickinson, Baxter, Edwards and Fresenius Kabi.

The Dominican Republic was traditionally an exporter of primary products such as those from mining, but the economy has changed, and medical devices are now the main export category

José Manuel Torres, ADOZONA

The key to the Dominican Republic’s success in attracting medical devices manufacturing, according to local experts, is its free trade zones, an initiative that provides attractive tax incentives and a specialized logistics launching platform. Trading activity in the free zones account for 60 percent of the country’s exports and include 711 companies that operate in 65 industrial parks.

“The Dominican Republic was traditionally an exporter of primary products such as those from mining, but the economy has changed, and medical devices are now the main export category for both the free zones and the country. In 2019, free zones exported US $6.2 billion, of which US $1.6 billion came from medical devices,” reveals Torres.

William Malamud, executive VP of AmCham Dominican Republic, agrees, saying that the Dominican Republic is “not going to compete with Mexico in large scale manufacturing because we do not have the scale, but we are competitive in free zone operations and productivity. There is also an advanced logistics infrastructure with world-class ports; the country was number two or three in Latin America in cross border trade, in ease of doing business. For companies that care about speed to market, we have quick turnaround times.”

“Rising transportation costs from China have given the Dominican Republic an advantage since it can take eight weeks for shipments to get to the East Coast while we have two and a half days to Miami, four days to New Orleans, Savannah, Charleston, and South Carolina. We have the speed to market which is key when manufacturing is moving closer to the major markets. Companies are rethinking where their production and supply chain should be located, especially in the US where geopolitical tensions are rising with China,” Malamud contends.

 

A classic Latin American public healthcare system

In line with other developing countries in the continent, access to public health is a challenge that persists in the Dominican Republic. The Ministry of Health provides services, directly or indirectly, to 75 percent of the population. Care is free but there is a cap on budget for medicines and there is no guarantee of access or quality. Like many countries in the region, the private sector provides healthcare to the upper-economic segment of the population under a government-controlled system.

The health system (Seguro Familiar de Salud) has two mechanisms: The Contributive Insurance Plan, for formal workers, their families and for retirees, and the Subsidized Insurance Plan for the rest of the population.

“It would be inaccurate to affirm that the social security system has comprehensive coverage for all Dominicans because the yearly quota per patient is 8,000 pesos (around US $130). It is not much considering that the average product price is between US $12-14,” says Genald Senior, president of one of the main pharma distributors, Leterago.

Because of the price restrictions Senior alludes to, some companies, particularly importers, choose to work with the private market. Spanish Ferrer is one of the multinational companies that caters primarily to the private market. “The public healthcare system is complex. We have a strong brand that is trusted by doctors, but mostly in the private healthcare industry,” says the company’s general manager for the region, Alejandro Mora.

According to him, the Dominican system is not unique in the region but still lags behind other models, such as Costa Rica’s: “When you analyze a healthcare system such as Costa Rica’s, you encounter a sole public health actor which deducts fees from workers’ salaries and grants them access to the system. In the rest of the region, companies will find one traditional social security system that covers between 40-90 percent of the population, and a Ministry of Health that does not collect fees from workers but rather use public funds to treat the most vulnerable population, and private insurance for people who can afford it. Adding some complexity, in those markets you will find NGOs and other private-public partnerships.”

The constraints in the government’s budget notwithstanding, the new government administration, led by President Luis Abinader, announced a program last year to add two million people to the public health system.

“There have been governments in the past that have tried to centralize the system, leaving out private institutions, but the new government has indicated its desire to have a free market that ensures quality and competitive prices in the healthcare system. They recently announced a plan to expand the social security system to cover another two million people which, if accomplished, will certainly raise the population’s quality of life,” analyzed Henry Suarez from ARAPF, the association representing Big Pharma companies, adding that the country’s public finances restrictions cannot be overlooked because “the approach so far has been to gradually include more people and therapies to avoid bankrupting the state.” At the end of the day, he concludes, the gradual increase of coverage has helped the pharma market grow and citizens are reaping the benefits.

The new government has indicated its desire to have a free market that ensures quality and competitive prices in the healthcare system

Henry Suarez, ARAPF

For multinational companies, one of the most pressing issues in the Dominican Republic and the whole Central America & Caribbean region is the characteristic unequal access and quality of care among the public and private markets. “That is a fundamental topic for Latin America, one of the greatest challenges. There are two sides to this question; all stakeholders in healthcare have the challenge of increasing access but also achieving equal care. We do have to close the gap to have both equal access and quality of healthcare,” explains Alejandro Paolini, Managing Director of Siemens Healthineers for Mexico, Central America, and the Caribbean.

But, according to Paolini, closing the gap will not be easy and will require a change in the way companies approach the market and more spending from governments: “we do have a role to play to increase access and achieve equal care; we can do it through innovative business models to make our technology more affordable… One of most straightforward ways is increasing the level of investment in healthcare because countries in the region are spending around 6 percent of GDP on average while developed countries are spending sometimes over 10 percent.”

In recent years, the Dominican economy has been supported by a continuous process of regulatory modernization, which has led to a variety of measures aimed at opening and commercially integrating the economy into the international markets.

According to Fernando Espinal, president of Infadomi, the local manufacturers’ association, DIGEMAPS – the government agency responsible for issuing the certificates that allow the commercialization of drugs and pharmaceuticals – has improved significantly over the last four years. The registration process, which used to take over a year to complete, has been reduced to approximately four months in many cases.

Henry Suárez agrees, albeit with different timelines: “Around seven or eight years ago we had a regulatory crisis in which it took between eight to 20 months to register a product. It made any product launch a headache. The last government, pressured by ARAPF and Infadomi, finally understood that the private sector is not the enemy of the public sector, that we are all here for a common goal. It took time, but finally, local laboratories with good manufacturing practices and multinational importers were given fast registrations in around three months.”

 

A pharma market dominated by local companies

While the Central America & Caribbean region is mostly controlled by multinational companies, considering that only 4 of the top 15 companies in terms of revenue are based in Latin America, the Dominican pharma market is at its core a local and generics market.

Around 75 percent of the market in terms of units sold belongs to national companies. “The Dominican industry offers good quality products that can compete with lower prices, making it more accessible for patients. Local products have gained the trust of doctors, who understand that therapies being prescribed offer the same result but at a considerably lower cost,” explains Leterago’s Genald Senior.

This is an opinion shared by Fernando Espinal: “I believe that Infadomi and its members have been able to gain doctors’ trust by offering high-quality medicines at affordable prices. Our members have done an extraordinary job of having the right product at the right time. Doctors trust the local brands because the quality has proven to increase year after year,” adding that the market is “fragmented enough to almost achieve an environment of perfect competition, a situation that fully satisfies the demand for medications and therapies. There is always offer to the demand.”

Doctors trust the local brands because the quality has proven to increase year after year

Fernando Espinal, Infadomi

The Dominican pharmaceutical market has grown to reach over US $700 million and, before the pandemic, was on track to reach one billion dollars, in part because of a remarkable feat: health insurance coverage went from 23 percent in 2011 to 65 percent in 2015, and is now over 75 percent, according to the US Centers for Disease Control and Prevention.

The domination of local companies, for some, has to do with an uneven playing field in which local companies do not have to adhere to strict compliance guidelines. “One of the main differences between multinational companies and local companies in the country is that we always act in accordance with strong ethical rules and other added values. We have an integral approach, sustainable over time. Our way might be slower, but it is one in which we are comfortable,” says Alejandro Mora, country manager for Central America & Caribbean for Barcelona-based Ferrer.

According to a high-level executive of an American multinational present in the country who chose not to be identified, local laboratories offer very competitive prices that “make it very hard to participate”, but, on the other hand, innovative companies can compete with better opportunities in the arena of high-tech products.

Challenging that ethical perception, Fernando Espinal contends that the whole industry is inclined to follow compliance practices. In his view, the fact that multinational players have stricter guidelines does not mean that local companies do not follow them. “Local companies have a natural advantage because they are able provide more samples to doctors, but that is not unfair by any measure; they just have sufficient production to afford it and can react fast to market opportunities. If doctors are able to give samples to patients so they can begin their treatment, it is normal that they will continue with those medicines. The difference lays in the reaction capacity of local manufacturers after they clear the regulatory hurdles,” he says.

For others, the truth might be in the middle and the situation reflects an effort from the government to make medicines affordable in a country where access to healthcare continues to be a challenge. “It is true that competition with local companies is strong, but it is friendly competition; there are very few patents left and average prices are relatively high. There is plenty of room to grow and therapies to introduce,” reflects Henry Suarez, president of ARAPF, the association representing multinational pharma companies.

 

Impacts of the pandemic: bouncing back quickly

Similar to their Latin American counterparts, the Dominican Republic was caught off guard by the pandemic because of the status of its healthcare infrastructure.

“[The pandemic] hit everybody hard, there is no getting around that. Although, it has hit the Dominican Republic less hard than most other countries in Latin America,” says William Malamud of AmCham.

Looking at the numbers from the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), the Inter-American Development Bank (IDB) and the World Bank, the impact on the nation’s GDP has been below the average for the region, projecting a 5.5 percent growth in 2021 and over 5 percent in 2022.

According to Malamud, the situation was aided by a quick response from the government: “The government really stepped in fast. They encouraged companies to keep people on the payroll and gave them financial support to do it. People that were put on furlough were still getting some income and the companies didn’t have to let them go.”

Some companies are investing significantly to expand their operations and there is every indication that a large amount of investment is coming

William Malamud, AmCham

Because of that favourable response, the industry, particularly medical devices manufacturing, has bounced back to pre-pandemic levels. “We were around 40 percent of capacity at the end of last year. The free zones were affected the first couple of months and started gaining in May and June, after that, exports were better than the previous year; January and February were the best export months ever,” said AmCham’s president, adding that employment in the free zones is back 100 percent and growing.

“Some companies are investing significantly to expand their operations and there is every indication that a large amount of investment is coming. On the other hand, the local economy will take longer to recover because small businesses have taken a big hit and did not have the same cash reserves as large corporations,” he explains.

Sharing that perspective, medtech giants with a strong presence in the region such as Medtronic are maintaining their investment position and monitoring the situation to understand when surgical operations will return. “The reality is that we have to wait for the healthcare systems to make their own decisions. Costa Rica, for example, feels confident in returning to some elective surgical procedures; but Panama, on the other hand, is lagging because they feel that it is not the right time. You will find other countries in Central America that are preparing to resume some surgeries because they understand that it is creating a health problem. The postponement of so many procedures is negatively affecting patients. Routine surgeries are becoming emergency surgeries,” forecasts Héctor Orellana, Medtronic’s VP for North Latin America.

For other medical technology companies, particularly the ones with a strong portfolio of COVID-related products, 2020 created new opportunities. “2020 was a new world but we had good results that have continued in 2021. However, there was a change of the equipment driving our growth. The good result during the pandemic is due to our diagnostics products and Covid-19 related equipment since Siemens Healthineers has a broad offering for pandemic-related treatments and diagnostics. We have molecular diagnostics systems for PCR, antigen and antibody testing for Covid-19. It has been a difficult time for everyone, and we are glad that our technology has been able to help patients across the region,” says Siemens Healthineers’ Alejandro Paolini.

For pharmaceutical companies, on the other hand, the pandemic was a time of ups and downs with a bright future on the horizon. “It has been a rather challenging year for everyone. When the pandemic hit the country, back in March of last year, there was a spike in panic-induced stockpiling. We broke sales records. In the four months that followed, the sales dropped significantly because doctors were not prescribing,” reveals Senior from distributor Leterago.

“Our forecast for 2021 is similar to last year; it will be a tough year, but we will manage by controlling prices and expenses,” Suárez from ARAPF predicts.

 

The road ahead: logistics hub and a better US relationship

Considering that the United States is the Dominican Republic’s main trading partner, accounting for 53 percent of exports and 50 percent of imports, it is clear that their economic short- and medium-term future hinges on a mutually beneficial relationship. Fortunately for the Caribbean nation, recent political developments promise to bring just that.

“The Abinader administration is much more US- and business-friendly than the previous administration; we have a very constructive working relationship with them,” explains William Malamud from AmCham DR. According to him, the US-Dominican relationship has been good for decades, but different political approaches have had different impacts.

“A number of the decisions taken by the Trump administration were beneficial for us. Namely, the tougher approach to China has caused many companies to rethink where they operate if their core market is the United States. We knew that the administration was going to be more demanding that the Dominican Republic lived up to its obligations outlined in international agreements, and that is great, we want that, too,” he says.

With the Biden administration now in place, he predicts that the relationship will not see significant changes in terms of priorities except for a new push on climate change and sustainability. The main opportunities, he forecasts, rely on the country’s geographical location: “the country can be positioned as a logistics hub because we are in the crossroads of major trading routes that go through the Panama Canal and from the US to South America. We have a whole ecosystem of logistics operators and highly international terminals.” He also predicts more investment in medical devices and perhaps pharmaceuticals, where local companies can team up with the Puerto Rican industry.

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