Regulatory burdens on SA’s pharmaceutical industry

A graph from BMI Research depicting annual sales in the South African pharmaceutical industry The pharmaceutical industry operates under a controversial and highly regulated web of legislation that aims to balance the interests of the end users, medical aid companies, manufacturers and patent holders. Shannon Butler, field credit analyst at Coface, the international trade credit insurance company, looks at the latest industry developments.

Controversy and regulation frequently coalesce around the concepts of increased access, availability, incentives, profitability and the cost to end users. This is understandable considering the enormous role the pharmaceutical industry plays, particularly in a country such as South Africa with its relatively high disease burden. The most recent debacle around the industry centres on the relationship between medical aid providers and pharmaceutical distribution channels.

Medical aids negatively impacting independent pharmacies

Recently the Independent Community Pharmacy Association (ICPA) released a petition requesting the Department of Health to investigate the way penalty co-payments are made as well as seeking an end to the practice of closed medical scheme pharmacy networks.

The ICPA’s argument is that because of these undertakings by influential medical aids, independent pharmacies are unable to compete and are seeing a decrease in profits. Compounding this is the highly regulated pricing regime under which the industry operates. As per the Medicines and Related Substances Act, the Single Exit Price mechanism lists the maximum price that distributors can charge for medicines, exclusive of any dispensing fees.

This has been placed in the public interest to ensure that the prices of medicines are not prohibitively expensive. This model is biased towards larger players in the market. They are able to purchase drugs on a larger scale, minimising the overall cost per unit and making closed medical scheme pharmacy networks an attractive proposition for medical aids that are constantly trying to minimise costs.

Exchange rates and exit price increases

The single exit price is determined on an annual basis with further adjustments allowed under exceptional circumstances. An adjustment is expected to be made in 2016 due to the Rand’s 30 percent decline against the US Dollar over the last year. Similar adjustments were made in 2010 and 2012.

For the annual review, the Minister of Health approved a 4.8 percent increase for 2016 and intends to approve a maximum increase of 5.70 percent in January for 2017. The price is determined on a weighted scale taking into consideration inflation, the Rand exchange rate and an international price basket.

Optimism surrounding SAHPRA

In line with this, there are developments unfolding with new industry regulations which are expected to have potential positive and/or negative ramifications in the medium to long term.

A positive development is the anticipated introduction of The South African Health Products Regulatory Agency (SAHPRA). This agency is being introduced with the aim to address shortfalls in the medication registration process at the Medicines Control Council (MCC) which it will replace.

Currently the MCC is said to lack capacity resulting in large delays in the approval of drugs for sale domestically. It is argued that medicine takes twice the global average to be approved in South Africa. This also has implications across Africa with a number of countries relying on South Africa to make a decision on the approval of drugs due to a lack of capacity. SAHPRA, which is currently in its founding phase, expects to increase capacity and speed up the approval process with dedicated staff processing registration applications.

This is expected to assist pharmaceutical companies in the speedier recoupment of development and manufacturing costs. Additionally, complementary and alternative medicines will now have to be registered under the agency. With this, it is expected that these drugs will now need to demonstrate their safety and efficacy, resulting in a consolidation in the number of products on sale. The department has set 1 April 2017 as the target date for the establishment of this new entity.

Intellectual property and where it’s headed

The Department of Trade and Industry has drafted a reformed National Policy on Intellectual Property. This draft legislation, drafted in August 2013, outlines reforms to the patent law which, once implemented, will limit pharmaceutical patent monopolies. Should the reform go ahead, new laws will be implemented resulting in lower drug prices for individuals and the government through cutting out patents and stimulating competition from generic drug makers.

This is likely to affect large players in the development of new drugs due to limitations on patents granted, shortening their monopoly on certain products in the market. The past year has seen numerous deadlines pass for finalising the policy. According to the Fix the Patent Laws coalition campaign from the Treatment Action Campaign (TAC), multinational pharmaceutical companies have put pressure on government resulting in the delays.

Category insights and future prospects

According to research, pharmaceutical sales in South Africa are expected to record a five year compound annual growth rate of 8.9 percent over the 2015 to 2020 period. This is lower than the 12.1 percent recorded over the previous five year period. The majority of sales are of prescription drugs representing around 88 percent.

This includes the sale of patented and generic drugs. In the five year period 2015 to 2020, these sales are expected to grow by 9.2 percent. The remaining sales are attributed to over-the-counter medicines contributing 12.1 percent to total sales which are expected to record a compounded annual growth of 7.5 percent over the next five years.

Despite the high level of regulation in the industry, the country’s high disease burden and status as a gateway to other emerging and less penetrable African countries, with expanding pharmaceutical markets, ensures a positive outlook over the next few years.

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