19/11/2010 Phindiwe Mguda assistant Pharmacist packing medication at Bank city Pharmacy in JHB. (676) Photo: Leon Nicholas

Asha Speckman and Londiwe Buthelezi

THE Department of Health has proposed a freeze on the single exit price (SEP) of medicines for a second consecutive year, saying the economic principles that determined prices did not justify an increase.

This year, the department said, the factors proposed by the pharmaceutical industry were taken into account when price adjustment yielded a decrease and this was very likely to be repeated in the 2012 determination.

The formula for price adjustment is 70 percent dependant on the consumer price index (CPI), 15 percent on the exchange rate and 15 percent on the rand’s purchasing power.

“Last year that formula resulted in a price decrease, but we didn’t want to say they (pharmaceutical companies) must decrease prices,” said Anban Pillay, the head of pricing at the department. Pillay said some companies were charging well above the international average on a number of medicines, so the department had proposed the international benchmarking method.

“International benchmarking is a process that is used across the world by countries who want to make sure that pharmaceutical companies do not take advantage of their citizens. In South Africa we are sold medicines that are made in the same factories as the other countries who use this method, so why should we pay more?” he asked.

The department said medicine cost increases were not affected by domestic inflation but by import exchange rates. However, medicine distributors did not cut prices when the exchange rate was to their advantage, but raised prices when the exchange rate was weaker.

Cobus Venter, a director and health economist at Econex, said: “The domestic market for medicines or pharmaceuticals is heavily dependent on imports and the rand is trading weaker than it has during the past year.

“This will imply that no increase will have an impact on the trading margins achieved in the domestic market simply due to the currency movements, never mind the other known inflationary pressures that are in the system and relevant to the sector such as fuel and toll costs and electricity.”

Tinotenda Sachikonye, a health-care analyst at Frost & Sullivan, said the non-increase could have an adverse impact on manufacturers, especially as this would be the second consecutive year without an increase.

“SEP affects manufacturers more, particularly in 2011 when there was no increase. At the same time when the CPI increased, there was an increase of the producer price index.”

Manufacturers had realised shrunken profit margins. Now the industry’s average profit margin had fallen to between 10 percent and 12 percent before tax and only bigger players were still able to realise profit margins of up to 30 percent.

She said the impact was less on pharmacies as they could add a dispensing fee to the SEP.

Paul Anley, a board director of the National Association of Pharmaceutical Manufacturers (NAPM), said it accepted that the proposed decision was based on the application of a formula that included the CPI and currency movements.

“While the application of the formula may well indicate that no increase is due, there is considerable risk that the rand could weaken considerably before year end. Should this then be the case, the NAPM calls on the department to conduct an interim review using historical annual averages,” he said.

Sachikonye added that although she could not forecast the rate of imports as a result of the proposed non-increase, there was a policy clash between the Department of Health, which wanted affordable pharmaceuticals, while the Department of Trade and Industry wanted to revive manufacturing.

Venter said that economists were always sceptical about direct price interventions unless it was to correct clear and proven market failures.

“The final price that any product realises is the end result of a complex set of interactions. It is because it is so difficult to understand these interactions that it is often wise to rather direct the regulatory intervention to the point where an actual market failure occurs,” he said.