Concern over rising medicine prices in SA as Adcock Ingram profit soars

The Adcock Ingram Group on Wednesday (29 August), reported a 20% increase in trading profit for the year ended June 2018, to R866 million – which it attributed to its acquisition of Genop – an average realised price increase of 3.8%, and improved volumes.

Group turnover increased by 10.2% to R6.540 billion, while headline earnings for the year from continuing operations increased to R645 million, which translates into headline earnings per share from continuing operations of 387.7 cents, an improvement of 26%.

A dividend of 86 cents per share was declared by the board for the year ended 30 June 2018 out of income reserves. The total dividend distribution for the year amounts to 172 cents per share, an increase of 24% over 2017.

“The positive results were achieved through continued investment in our well-established brands, improved factory efficiencies, and a relentless focus on customer service and product quality,” said Adcock Ingram CEO Andy Hall.

All commercial divisions showed an improvement in trading profit, with the prescription, over-the-counter (OTC) and hospital divisions’ growth all above 15%. The consumer division showed a muted trading profit growth of 2% which must be seen in the light of the challenging environment they’ve operated in, characterised by limited consumer discretionary spend, the group said.

For Southern Africa, OTC, which focuses on products in the pain, coughs, colds and flu, and anti-histamine therapeutic areas through the pharmacy channel, has seen a turnover improvement of 7.6% to R1.989 billion with top brands like Adco-Dol, Allergex, Alcophyllex and Napamol showing double-digit growth.

“This business unit realised the full SEP price increase granted by government,” Adcock Ingram said. “Mix and volume improvements were healthy, following innovative new product launches and decent demand for smaller pack size analgesics.”

Another hike in medicine prices

Adcock Ingram’s results come at a time when pharmaceutical companies are requesting a second price increase for medicines. They claim they are struggling due to the VAT increase earlier this year.

The Health Funders Association (HFA) on Tuesday said it was strongly opposed to any interim increase in medicine costs this year.

Medicine prices are regulated. The single exit price (SEP) mechanism lists the maximum price that a medicine can be charged at, with dispensers able to charge a fixed dispensing fee depending on the price of the medicine.

Lobbying efforts by industry were for a further increase over and above the 1.26% which was approved for the 2018 financial cycle and communicated in the Government Gazette No. 41362 of 29 December 2017, to compensate for rising inflation and the increase in the rate of VAT, HFA said in a statement.

According to claims data from HFA member schemes, if an interim single exit price increase to the level of CPI were to be allowed, as proposed by the pharmaceutical industry, medical schemes would incur an additional cost of at least R260 million over the remaining four months of 2018 (considering projected volume growth).

The annualised impact of this increase would be over R1 billion in 2019, even before next year’s single exit price adjustment.

“Our considered view is that medical aid schemes and the South African healthcare consumer simply cannot afford to shoulder the burden of this additional medicine price increase during this current cycle,” said Lerato Mosiah, CEO of the HFA.

The HFA argued that the inflation rate of medicine is already considerably higher than the negotiated single exit price adjustment. The general public may not understand or even be aware of this.

“Based on data from our member organisations, medical schemes have experienced significant cost inflation during the first half of 2018, a trend which is expected to continue through the rest of 2018 and into 2019. Overall cost inflation of medicine is driven not only by the SEP adjustment but by volume growth as well, which compounds annual medicine price increases.

“Our data shows that, despite this year’s regulated SEP increase of 1.26%, during the first half of 2018 overall cost inflation for chronic medicines has increased by up to 6%, and up to 8% in the case of cancer medicines for some medical schemes,” said Mosiah.

Impact of VAT hikes

This increase has been compounded by the VAT increase from 14% to 15% which was not factored into medical scheme budgets for 2018. The HFA estimates that this factor alone has imposed an additional R875 million unbudgeted expenditure on the medical aid industry in the current financial cycle.

“Nonetheless, the vast majority of medical schemes opted to find ways to absorb this unbudgeted cost within their already stretched operating budgets, rather than seek to introduce interim contribution increases from members who are already under significant financial strain,” Mosiah said.

“Our plea is that the National Department of Health should maintain the SEP increase as originally gazetted for the current cycle (March 2018 – February 2019), in the interest of healthcare consumers.”

Looking ahead, Adcock Ingram said it is engaging constructively with the National Department of Health through the Pricing Committee on whether any short-term relief on SEP will be available.

“The board remains committed in seeking additional affordable brands to augment its range of products and defend its position in the market. Expanding the non-regulated portfolio to limit the impact of the exchange rate and SEP environment remains a focus in this regard,” it said.


Read: How pharmaceutical companies blocked cheap generic medicines in South Africa – and why that’s set to change

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Concern over rising medicine prices in SA as Adcock Ingram profit soars