Drug pricing committee denies ‘ambiguity’ in its formula

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The advisory body that guides the Health minister on medicine price increases says there is no ambiguity in the formula it applied, contrary to the view put out by the industry on Monday. Business Day reports that pharmaceutical manufacturers are lobbying the Health Department for an extra price hike to cushion them against the weakening rand, which has made imports more expensive and pushed up their production costs.

But they are also seeking greater clarity on how the pricing committee determines its recommendations to the minister, as drug makers have been consistently disappointed in the annual price increases they are permitted. They were granted a below-inflation adjustment in January of 1.26%.

The report says while pharmaceutical manufacturers can freely determine the launch price of their products, from that point on they may not increase their private sector prices beyond an annual threshold set by the minister, known as the singe exit price.
Typically, they are permitted one price increase a year, but there is scope for the minister to grant extra price increases, as he did in 2016 when the rand weakened significantly.

The Pharmaceutical Task Group (PTG) which represents South Africa’s major drug manufacturing associations, said on Monday that the formula used by the pricing committee did not provide sufficient certainty to the industry. The committee had too much discretion in how it applied the formula and it was not clear how it reached its final figures, said task group spokesperson Stavros Nicolaou. However, the committee’s chair, Fatima Suleman, said that the industry knew exactly how it worked.

“The pharmaceutical industry proposed a formula to be used in the determination of the fee. The pricing committee has considered the formula calculation each year, and it is captured in our (notice for public comment) as follows: 70% (South African CPI) + 30% (foreign exchange rate) = % adjustment,” she is quoted in the report as saying.

“The PTG have over the years indicated that they would prefer that we keep this formula and that we apply it consistently each year, and they have been quite adamant about this in the past, as is captured in each of their submissions.

“The pricing committee has applied this over the past few years in a consistent manner. In fact, we have submissions that indicate that the PTG have previously known the range in which the calculation will fall,” said Suleman. “The difference may come in in terms of the CPI averages used or the months for which these are calculated. It could also be in terms of the exchange rates applied.

“However, last year (2017), the submission by PTG did indicate the range within which the single exit price adjustment could fall and the same holds true for 2016,” she said.

The report says the PTG is unhappy with this year’s 1.26% single exit price adjustment as it says it failed to keep pace with inflation, and did not cover increased input costs. An increase in line with inflation would have been acceptable to medical schemes and the general public, said Konji Sebati, CEO of the Innovative Pharmaceutical Association of SA, a member of the PTG.

“Pharmaceutical companies are all local operators, exposed to local CPI and above-CPI wage increases, whether they are South African or multinational companies. As a general guide, the operating costs of pharmaceutical companies have increased by 6% over the period in question,” she said. “The pharmaceutical industry has had to respond to the compounded below-inflation increases by reducing staff where possible. Given that the presidency has placed job creation as one of the key priorities, this is not encouraging,” she said.

The report says the industry has also been hard hit by the slide in the rand, which has weakened by 14.1% against the dollar since the start of the year. It has twice breached the R15/$ mark in August.

Business Day report

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