TCS Daily

Out of Africa

By Richard Tren - January 27, 2004 12:00 AM

When I awoke on Sunday morning after a late and raucous Saturday night, I was dismayed to find not a single aspirin in my bathroom cabinet. The process of trying to buy a box of headache pills however only worsened my throbbing head. To comply with recently instituted regulations, all pharmacies have to keep detailed records of every single medicine sold, whether prescription drugs or just over the counter aspirin; so I waited with dozens of other unfortunates, for what seemed like an eternity, while the clerk punched in names, addresses and telephone numbers of every customer.

I'm not sure that I like the idea that the Minister of Health now knows what type of headache pill I prefer, nor do I like putting my name and address into some mysterious database. Yet the rules that delayed headache relief are trivial compared to the government's new draft drug pricing regulations, a regulatory headache that no pill can overcome.

Earlier this month, the government released its "regulations relating to a transparent pricing system for medicines and scheduled substances." Drug companies, distributors and pharmacies are now up in arms, with good reason, over these regulations.

The draft regulations stipulate that distributors and wholesalers can only charge a fee of up to 15% of the manufacturer's price for a medicine that costs less than R40 (US$ 5.50). If the drug price is above R40, they can only charge a maximum of R6 (US$ 0.83) in fees.

Pharmacists can only charge a maximum of 24% on any medicine priced at or below R100 (US$ 13.8). Above R100, they have to fix their fees at R24 (US$ 3.33). Other vendors, such as supermarkets that may sell some over the counter drugs, have to cap their mark-ups at 16% for drugs priced under R100 and are not allowed to charge more than R16 for any drug that costs more than R100.

Analysts and market commentators have raised some serious concerns about the proposed pricing and fee plans. One leading health-sector analyst, Julian Vernon recently warned that the fall out for pharmacies will be drastic. "Community pharmacies, especially, will be taken out of business. The big ones can make up their losses on volume trading, but we aren't even sure of that," he said in a recent newspaper report. "It could be that the regulations will destroy the profit pool of the industry. It's quite a scary outlook. It could wreck the industry in its current form."

It is in the poor townships and rural areas where the impacts of the pricing regulations will probably be felt the most. If, as Vernon predicts, these community pharmacies are driven out of business by the Minister's new regulations, South Africa's poor will have to travel long distances to city centres and smart shopping centres just to get some medicines. The government's measures to ensure cheaper and more readily available medicines may result in quite the opposite by reducing competition and choice

If the impacts on the retail sector are expected to be harsh, they can only be worse for manufacturers. The government disapproves of the current system of pricing, the so called "Blue Book," deeming it insufficiently transparent. Moreover, it allows drug manufacturers to offer distributors and retailers a series of discounts, rebates and other incentives. In its stead, the government will require that all manufacturers declare and publicise widely, a single exit price for all medicines. That price can be no more than 50% of the current price and can only be increased (according to criteria set out by the Minister) once a year.

In addition to the draconian price cut edicts, the government will require all drug producers to provide it with precise details on almost every aspect of their business. These include details on the costs of developing and testing drugs, the costs of manufacturing, marketing and selling drugs, information on revenue received and "any other information considered necessary by the Director-General."

Through these regulations, the government intends to ensure that South Africans have access to affordable medicine through a "healthy manufacturing, wholesale and retail industry." The Minster of Health says the government has "no wish to undermine this industry -- only to make it fully accountable in the interests of the consumer."

Yet undermining the industry is precisely what the government is doing, and no trite statements from the minister will change that fact. These pricing regulations come shortly after the government's new Health Bill, which is grossly punitive towards the private sector and looks set to nationalise healthcare by simply driving out the private healthcare sector. Research based drugs industry will see these new regulations as yet another attack on their once profitable business in South Africa and will continue their exodus. In the 10 years since the ANC government has been in power, 22 drug companies have left South Africa, and the proposed pricing measures look set to drive the remaining companies away as well. Why would they stay here when the government demands that they cut their prices by an arbitrary 50% and can then only increase prices once a year?

Several commentators, including the opposition party health spokesman, have pointed to the fact that the government published these proposed regulations in the run up to an election. There is no doubt that the government has its eye on the ballot and is keen to demonstrate that it has the interest of poor South Africans at heart. Yet these regulations will simply drive drug producers, distributors and retailers out of business, and the poor will pay dearly for this.

What is worse for the poor is the effect that this will have on the investment climate. The government is supposedly interested in increasing foreign investment and yet reduced economic freedom and government edicts are the order of the day. It's not surprising that other countries look far more attractive as investment destinations.

Tren is a director of the health advocacy group, Africa Fighting Malaria and a regular TCS columnist.


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