News Column

Price rise of 5.82% allowed for drugs zz 'Not enough' as rand slides

February 3, 2014

Seeking to maintain a tough balancing act of ensuring affordable medicines for all while avoiding running local drug manufacturers out of business, the Department of Health has announced a 5.82 percent increase in the single exit price (SEP) of drugs for 2014. The government introduced the SEP for medicines and scheduled substances in 2004 to put an end to discounts and additional levies on medicines. Every year the department adjusts the SEP to factor in inflation-driven increases in drug manufacturers' costs. The price adjustments are informed by a formula, under which 70 percent is based on consumer price inflation, 15 percent on rand/dollar variance and 15 percent on rand/euro variance. This year's increase was based on the recommendation of the department's pricing committee, which considered consumer and producer price inflation of the preceding year as well as currency movements and purchasing power parity. The pharmaceutical industry has differed on how far the announced increase would help restore its profit margins, which have been suppressed by escalating production and logistics costs as the rand depreciated by 18 percent against a basket of currencies last year. "It's not enough given the rand's depreciation, which has outstripped this," said Stavros Nicolaou , the senior executive for strategic trade development at Aspen Pharmacare . Val Beaumont , the chief operating officer of the Innovative Pharmaceutical Association SA , said the industry's main problem now was the cost of goods, as the rand's depreciation meant that "everything is costing us 20 percent more". "The 5.82 percent increase will partially offset the negative currency depreciationů but it's not enough to solve the problem". The effect of the rand depreciation was particularly harsh on importers of finished pharmaceutical products, but Beaumont noted that it was not much better for local manufacturers as the bulk of their costs was made up of imported raw materials. Generic drug companies import a large amount of their raw materials while local manufacturers of original products have to source the expensive active ingredients of their tablets internationally as few companies produce these locally. Local drug manufacturer Adcock Ingram announced on Friday that its earnings a share and headline earnings a share were expected to fall by at least 20 percent in the six months to March. Profit margins were under pressure as a result of an unfavourable revenue mix, rand depreciation, which negatively affected its cost of imported active ingredients and other materials, as well as cost input inflation, Adcock said. Last year, the Department of Health increased the SEP by a maximum of 5.8 percent but pharmaceutical firms said it was not sufficient to relieve the cost pressures that came with the rand's depreciation. The industry's main disapproval was that the method used to calculate the SEP adjustment was based on mid-year inflation and exchange rates of the previous year. With the 5.8 percent SEP increase last year, a paediatric ibuprofen drug whose manufacturer's price was R30.86 cost R40.68 after SEP adjustment. The latest increase means cash-strapped consumers will have to dig even deeper into their pockets as a large proportion of medicine expenditure is financed out-of-pocket. The Council for Medical Schemes's annual report for 2012/13 showed that medicines made up 24.9 percent of medical scheme members' out-of-scheme expenses in 2012. Only 13.9 percent of benefits paid from schemes' risk pools went to medicines. The department said pharmaceutical products that companies introduced after December 20 would be excluded from the SEP increase. This was because the department planned to use the price files as at December 20 as the basis for its calculations. Pretoria News

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Source: Pretoria News (South Africa)

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