Health Minister Aaron Motsoaledi has gazetted an increase in the single exit price for medicines and scheduled substances, which the pharmaceutical industry says is "pitifully low" and will have a devastating impact on small manufacturers, in particular. Business Day reports that the Pharmaceutical Task Group, which represents all the formalised trade associations and covers about 95% of the market, plans to take up the 1.26% increase with the minister in a bid for him to use his discretion to decide on an increase that is higher than that generated by the formula used.
Aspen Pharmaceutical senior executive Stavros Nicolaou said that while the industry agreed that the increase was based on the formula, the minister had discretion to make decisions outside of it. In the long term, the industry wants to have the formula restructured so it adequately reflected market forces.
"In the past, the formula has only been used as a guide. The minister does have the discretion to operate outside of it and has applied this previously. Although the percentage increase was not totally unexpected, it does not accurately reflect real market conditions insofar as some of the inflationary drivers in the industry are concerned, such as input costs and salaries and wages," Nicolaou is quoted in the report as saying. Medical scheme increases, for example, had been much higher than the 1.26% – between 7% and 10.5%.
The industry wrote to the independent pricing committee, which advises the minister, and highlighted these concerns in November appealing for the use of ministerial discretion and the use of the formula simply as a yardstick. Nicolaou said if no adjustment was made to the 1.26%, smaller manufacturers might find it economically unviable to continue producing certain products.
Konji Sebati the CEO of the Innovative Pharmaceutical Association of SA, which represents multi-national pharmaceutical manufacturers, said the association was expecting an increase of at least 4%. She was baffled as to how the Health Department had arrived at the "very low" 1.26% figure as there was a set formula, nothing that, "From our observation, none of these factors (in the formula) were considered".
However, the report says the department’s deputy director-general for regulation and compliance Anban Pillay insisted that the formula — which the pharmaceutical industry itself had agreed on — had been rigorously applied and no objections had been raised during discussions with industry on the 1.26% increase. Pillay said the increase adequately took into account the elements of the formula, which included various factors impacting on medicine prices such as the exchange rate and inflation. He noted that the proposal to increase the single exit price was published for industry comment. The industry itself had done its own calculation and had come to roughly the same figure based on the formula.
The industry had proposed that possible future deterioration in the rand should be factored in by making a higher increase, but Pillay said it was not possible to determine a price increase on the basis of speculation.
The report says future rand-exchange trends were not something included in the formula. It was agreed, however, that an additional price increase would be made later in the year, should the rand deteriorate significantly, to compensate for short-term effects, as had happened in the past.
This is the lowest SEP increase in a decade – second only to 2011 which saw no increase at all – and comes amid growing utility costs and a depreciating Rand value and could see several players exit the market. This is according to Erik Roos, CEO of Pharma Dynamics – a leading generic pharmaceutical in the country, who points out that for the past decade the average pharmaceutical pricing has consistently been set below inflation. “This pitiful increase may just be the final straw for companies whose margins continue to face pressure and it would not be surprising if some of the smaller players are forced to close shop.”
He adds that the continued pressure on the industry also leads to products being pulled from market, which means a smaller variety of quality, affordable medicines for patients. “According to IMS data for 2012-2017, as many as 700 pharmaceutical products have been pulled from the South African marketplace over the past five years and it is not far-fetched to assume that the majority were pulled due to decreasing profitability rendering the molecules unviable.”
Consider that, excluding wholesalers and distributors, South Africa’s local pharmaceutical manufacturing sector employs and supports a sizeable total of 11,000 jobs across the country, making the sector one of the largest employers in South Africa, says Roos. “This past year already saw several players consolidating and decreasing their South African operations, which the country can ill afford since foreign investment and job creation remain critical to grow the economy.”
Roos also highlights concern about dwindling foreign investment as a result of compounded pressure on the industry. “Currently, South Africa remains the largest and most developed pharmaceutical market in Africa and could continue to charm large multinationals with its strong longer-term commercial potential based on its sizeable population of 56m people and high degree of financial market development. However, continued price restrictions, failure to comply with BEE guidelines and state organisations being compelled to buy from domestic suppliers could lead to a reduction in foreign investment and even result in some international companies pulling their national foothold.”
“On top of low price increases, the depreciation of the Rand will make the importing of active pharmaceutical ingredients pricier. To put things in perspective, currently more than 70% of pharmaceutical products on the continent are imported. The weak Rand is expected to add tremendous strain on even the biggest pharma companies whose margins are already under immense pressure.”
“Add to this the introduction of the SA Health Products Regulatory Agency (SAHPRA) this year, which is geared to greatly reduce medicine approval times and alleviate a backlog of thousands of registrations. Of course, the industry is excited for the much-needed change, but it comes with a hefty price tag and could see new product registration costs increase substantially.”
General inflation of utility costs such as the petrol price, the 5.23% electricity increase granted to Eskom and employee increases and remuneration also add to the strain, says Roos.
“There are many pharma companies, including Pharma Dynamics, that plough millions into corporate social investment initiatives to uplift underprivileged communities and increase access to affordable healthcare, but the reality is that these too fall by the wayside if pricing does not increase in accordance with general inflation.”
Roos says that the cries of the financially strained lower to middle-class population for access to affordable healthcare do not fall on deaf ears.
“The industry understands that the end user is no doubt also experiencing major financial pressure and that affordable healthcare is a priority for patients. We have always focused on bringing affordable medicines to patients, but medicine is no longer the main culprit – the data shows that medicines costs have been well contained and consume less of the healthcare expenditure on a year on year basis. On the other hand, non-price regulated bodies in the private healthcare sector are granted increases higher than inflation. Medical scheme increases, for example, have consistently outgrown inflation and this cycle is no exception with medical aids demanding a hefty increase between 7% and 10.5% from members.”
“This unbalanced implementation of price restrictions counteracts the lower medicine prices and impacts on overall healthcare expenditure for patients. It’s true that various factors play a role in these calculations and it is not a one size fits all formula across industries, but surely a warning light must go on when such a vast difference in annual increases is granted.”
“South Africa has the potential for marked pharmaceutical sector growth, but it is critical that government improves investor confidence by addressing imbalances on price restrictions and removing unnecessary barriers in order for the pharmaceutical industry to remain robust,” concludes Roos.
[link url="https://www.businesslive.co.za/bd/national/health/2017-12-27-health-ministers-low-single-exit-price-increase-disappoints-industry/"]Business Day report[/link]