Economic Analysis of the Pharmaceutical Industry in South Africa - Example

Economic Analysis of the pharmaceutical industry in South Africa Pharmaceutical industry in a country should be ideally well established in order to achieve self-sufficiency in its drugs requirements. Pharmaceutical industry has two sectors; bulk drugs and formulations. Though it may not be possible to become self-reliant in bulk drugs which are active pharmaceutical ingredients (API) since cost-effectiveness depends upon availability of starting materials, self-sufficiency is not difficult to achieve in respect of formulations which are in ready to consumer forms. But it does not mean, it is an easy task. This also requires sufficient know how for making stable preparations and ensuring their bio-availability in the long run. The shelf-life prescribed for the preparations are generally 6 months to two years and during this period, the preparations should be stable and bio-available. Hence to ensure manufacture of quality medicines, South Africa should have well developed industrial infrastructure offering machinery and equipments without having to depend upon overseas sources and should have skilled personnel available locally to ensure which, it should have the medical schools imparting pharmacy education. Besides, quality control equipments and personnel also should be freely available. Funds required for setting up the industry and for working capital should also be freely available. South Africa is a mixture of developed and developing country and its emancipation from apartheid in 1994 has put in on the cross-roads. Black People’s Economic Empowerment has been made mandatory in stages and full achievement (i.e 51% of ownership should be in the hands of blacks) has been envisaged by 2014. Country Overview As per the 2007 report of the IMF, South Africa has a population of 47.5 million with an annual growth rate of 1.1% and life expectancy of 45 years and infant mortality of 54 per 1000 live births. Population structure 32 % for 0-14 years, 63% for 15-64 years and 5% for 65 and above years of age. 34% of populations earn $2 a day. Per capita GDP is US$ 5,368. 22.5 % of the work force is in the industry. The report states that South Africa has shown steady progress in terms of economic performance with real GDP, employment and fiscal growth especially after the ending of apartheid. The economy has grown by 5% in 2006 for the third year in succession and 4.7% in the first quarter of 2007 itself due to growth in domestic demand. Employment rose by 4.1% in 2006. However unemployment levels reduced only moderately to 25 ½ % due to labor force participation. Wages increased by 9.1% per employee in non-agricultural sectors. Inflation increased to 6.3% breaching the Reserve bank’s target of 3-6 % band for the first time in 3 ½ years. Credit to private sector increased by 25.1%. Major objectives of the Government are to reduce unemployment and poverty considerably. (Staff Report, IMF 2007) Black Economic Empowerment Act 2003 envisages that ownership or control of the firms or business in health sector including pharmaceutical industry shall be at least 26% by black people immediately on coming into force of the act. And the percentage should be increased to 35 % by 2010. By 2014, the ownership itself should be not less than 51%. It has been mandatory for the Government to procure medicines from the black controlled or owned firms on preferential basis. It should be 60% until 2010 and 80% from 2014 onwards. Similarly development financing must be used for expansion of firms or starting of new ventures owned by black people. (Charter) The country’s Department and Trade and Industry (DTI) has identified six constraining factors to a sustainable growth: The country’s currency’s volatility, limited efficiency of the national logistic system, shortage of skilled labor, entry barriers and limited investment opportunities since the country’s economy is concentrated in industries such chemicals which would include pharmaceuticals, steel, telecommunications etc, regulatory burden on SMEs and lack of capacity and leadership in State organizations.(the DTI 2007) Industry Overview South Africa’s is the largest pharmaceutical market in the whole of Africa estimated at US$ 1.5 billion at retail price levels of 2002. (IMS 2003) Majority (83%) of its population is dependant upon public health system. (DoH, 1995:2) and 63% of total health expenditure came from private sector spending and out-of-packet spending as per a 2002 study. (Health Systems Trust, 2002). Pharmaceutical prices in South Africa were high and free from controls until the advent of National Drug Policy which set out transparent pricing system, cost reduction in medicines, mandatory substitution by generics at pharmacy level, Essential drug List (EDL), compulsory licensing, purchasing from international market on tender basis and parallel imports affecting invariably all the players in the medicine chain. (DoH, 2002) There were 15 leading multinational companies in South Africa. The two domestic companies Adcock Ingram and Aspen controlled 23.7% of the market. Leading prescription product was Lipitor of Pfizer. (IMS Health 2003:30-32) As early as in 1996, South Africa’s pharmaceutical industry had spent 425 million Rands on research and clinical research institutes spent 826 million Rands in 2000.(Chimere-Dan et al, 2001) The report of Martin (2007) says that pharmaceutical market in South Africa is characterized by faulty distribution net works in spite of drugs availability resulting in extremely alarming rate of deaths due to HIV/AIDs and decreasing trend of production capabilities due to factory closures in 1997-2000 at a time when the demand for drugs was increasing. Cause of deaths in South Africa as of 2004 is shown hereunder in figure 1.and decreasing trend in drugs production in figure 2. As can be seen in the figure 1, HIV/AIDs has affected 28 million people in South Africa, replacing wars and malaria as causes of premature death. This will result in decrease in life expectancy by 17 years to 43 years of age from 64 years of age now in that country as per a WHO study. Patent protection law in South Africa prevented importation or local manufacture of the anti-HIV drug by an Indian company CIPLA. US Patent lobby threatened South Africa in 1999 with sanctions for violation patent laws even if it was for the benefit of saving millions of lives afflicted with Aids. It was after the protests by the public interest groups from US itself; the US stopped its threats. Yet the controversy is still live. (Medicus Mundi Schweiz, 2002) Competition and Markets. Literature abound on the episode of law suits by pharmaceuticals companies on South African Government on its parallel importing and compulsory licensing to produce cancer and HIV drugs in spite of provisions in the WTO policy permitting such actions in case of national emergency. By 2000, nearly one million people died of Aids for want of medication costing $ 12,000 per patient due to monopoly and patent rights of the inventors, which would otherwise cost 90% less in generic form. The concerned companies had been selling at high prices even though R & D cost had been met by the U.S. Govt and also the U.S. Government was allowed by its law to share its inventions with other countries. However the companies had to withdraw their law suits against the SA Govt due to public policy concerns. (Davies L.J 2000) Market Demand and Understanding the Consumer. SA’s demand for drug is expected to touch US$2.1 billion by 2010 as a result of Government’s permission to sell cheaper branded generic drugs. The present market of $ 1.7 billion is expected increase by 4% annually reaching $ 2.1 billion by 2010. (Asia Pulse/PTI) On the other hand, Pharmaceuticals & Health Report 2008, states in its executive summary that Pharmaceutical spending by SA in 2006 was $ 3.08 billion and it is expected to touch $ 4.62 billion by 2011 and that market growth will be disrupted by cost cutting measures through national Health Reference Price List, and demand for anti-HIV drugs will continue to be high. Government’s planned procurement of Anti Retroviral will likely to be met by the rapidly expanding Enaleni Pharmaceuticals and Adcock Aspen Ingram. (Pharmaceuticals & Health Care Report South Africa 2008) South Africa’s well developed pharmaceutical market registered sales of R3 200 million in 1995 which was 0.3% of total SA sales in that year. Though the public sector serves 80% of the population, it amounts to only 15% in terms of monetary value. Private sector though forms 20% of volume of sales, value amounted to 85% of sales. (Karim, S) Market Supply and understanding the company's costs. Market supply of drugs is to some extent hampered by ceiling on prices and reference price list determined by the Governmental authorities. Pharmaceutical manufacturers are creating agencies of their own under the pretext of logistics and apportion a percentage of discount otherwise going to the wholesalers. The company owned logistical agencies in turn redistribute drugs to wholesalers. This leads unremunerative prices to the wholesalers and result in litigations in the Competition Tribunal as a measure against Anti-trust practices. It is felt that the covert practice is probably to circumvent the price control imposed on manufacturers. Hence unless there is freedom in fixing selling prices, the supplies are likely to be limited. Government should understand company’s costs and strive at free supply in the market. Market analysis, failure and responses. SWOT analysis of SA’s health sector should equally apply to its Pharmaceutical sub-sector also. Its current Strengths, Weaknesses, Opportunities and Threats identified are as follows: Strengths: SA’s work force is skilled and educated to international standards. There are pharmacy colleges besides centers of excellence such as MRC, SAMHS and medical colleges with pharmacy departments. There is enough capacity reinforced by financial investments for R & D in both the sectors of private as well as public. Sound health care policy of the Government is an enabling factor for development of pharmaceutical industries. SA has already good infrastructure of well laid roads, electricity and communication. The country’s economy is robust with health budget facilitating liberal expenditure inducing consumption of medicines. There is strong commitment on the part of the community to participate in health enhancement programs of the Government. Weaknesses: There is all-round corruption affording undue advantage to private sector, resulting in wastage, theft and fraud. Public sector is poorly utilized and its resources and capabilities are under utilized. R & D efforts are lacking in pubic sector and absence of encouragement to private sector is evident. There is no coordination between public and private sector. There is total abuse of affirmative policy in respect of tender procurements. A strong health sector is the backbone for development of pharmaceutical industry in the country. Opportunities: Information and communication technology enables access to remote areas facilitating telemedicine through satellites, cell phones, TV etc which in turn leads to more consumption of medicines. Technological developments in industrialized countries lead to new inventions and discoveries of vaccines, therapeutics, and diagnostics. As a regional health source, SA has the opportunity to provide health services to patients visiting from other countries. All these mean opportunities to pharmaceuticals sector also. Due to end of apartheid, SA can seize opportunities for international cooperation through WHO, UNDP, UNICEF, and others. Further disease burden prevailing in SA affords opportunities to pharmaceuticals also. Threats: International economic situation has reflected in South African economy also and therefore GDP growth has been less than the rate of population growth in SA. Decrease in job opportunities and job creation are causes of concern which can result in lesser demand for medicines due to poor payment capacity of people in general. Cost of health care has been on the rise without proportionate increase in income levels. Human resources are deficient due to brain drain in the country. New diseases add burden to the health care system resulting in uneven allocation of resources which can have an impact of consumption of regular medicines produced in the country. (Karim.S) Market structures and company strategies. As the country had been under the white’s administration, there had been well structured markets similar to western countries but benefits of which had been confined to white only. Due to the policy of Black Empowerment, the benefits should extend to blacks also and the company’s strategies would be focus on the increased consumption by blacks due to the said policy. The heavy burden of Aids is an opportunity for the local industry to establish itself through Governmental subsidies besides championing the cause of the South African natives afflicted with aids. Economic output and national wealth. Prior to becoming a democratic country in 1994, South Africa spent 6.66% of its GNP on health care but 48.5 % of it had come from private sector in 1992-93. In 1990 it had been 80%. South Africa’s National Drug Policy (NDP) Industrial Policy Action plan Report of 2007 by the SA Govt says that Pharmaceuticals sector together with that of Chemicals and Plastic Fabrication have generated about R 28 million i.e 2.8 % of GDP in the year 2006. Pharmaceutical sector is said to employ about 10,000 people. The report adds that pharmaceutical industry has import competition at high levels and burdened with coordination with regulatory requirement and state procurement of medicines, medicine licensing and price administration. (the DTI 2007) R & D expenditure by pharmaceuticals business sector was 11.3 million Rands during 1991-92(Jeenah et al) Rate of high increase in R & D expenditure on pharmaceuticals is however not matched with outcome of new chemical entities in the market. However Pharmaceuticals and Personal care products, categorized as sub-sectors of Chemicals sector performed best in spite of economic slow down due to September 11 attack as happened elsewhere in the world. South Africa’s GDP forms about 0.7% global GDP and Pharmaceuticals sector has contributed about 8% to the country’s.GDP (see figure 3 below) (DTI-Sector Profiles) Economic growth and business cycle. South Africa’s economy has been in the expansion mode of business cycle ever since 1999. The upswing in the business cycle from September 1999 to June 2005 has witnessed an average annual growth rate of 3.5% as against just less than 1% in the decade prior to 1994. South African Reserve Bank has asserted that there is no possibility of expansion mode of the business ending in the near future. Consumer inflation was 6.8% in 2003, 4.3% in 2004 as against 9.8% in 1994. It is therefore an opportunity for the existing and aspiring pharmaceutical units to take advantage of the positive trend of the business cycle. (The DTI) The pharmaceuticals sub-sector comprising of 8% of the chemical sector, is poised for growth since the Government has plans to develop local industry by encouraging production of antiretroviral drugs which are in high demand. (Key Sectors) Capital accumulation and technological progress The period from 1970s to 1980s witnessed capital and labor input led economic growth with an insignificant contribution of technology. During 1990s, capital growth was weaker and labor input was negative. However during this period, single largest contributor for growth was technology. The weaker growth of capital was due to decline investment rate while declining employment due to restructuring and labor shedding in major industries. (Fedderke 2005) For these reasons, there is no possibility of domestic investing contributing to 100 % of capital requirements of pharmaceutical industry. The existing pharmaceutical industries are well developed and are well paced to form strategic alliances with foreign pharmaceutical companies who are ready and willing to bring in the required foreign direct investment. Labor markets and Unemployment Unemployment in South Africa has been very acute and considered a socio-political problem of the country. The rate of unemployment is reported to be 40% which is huge. This may be due to presence of labor market segmentation and barriers to entry into informal sector for the unemployed. It may also be due to low wages which the unemployed are not ready to accept due to their own high reservation wages. (Kingdon, G. and Knight) In 2004, the rate was 26% of the labor force. Unemployment is found among the historically disadvantaged groups. Although there has been growth in unemployment, it has not been matching with the rate of economic growth Minimum wages legislation has also been a reason for unemployment. It has been reported that 1% of increase in minimum wages has led to 0.7% increase in unemployment. (Arora and Ricci)The pharmaceuticals industry can attract labor by offering reasonable wages and hence there is no such shortage of labor as a reason for setting up of pharmaceutical industries which are both labor as well as capital intensive. Role of Government and fiscal and monetary policy There are several hurdles both for domestic as well as overseas firms wanting to establish pharmaceutical industries and trade in SA. Registration of products takes 24-36 months with very cumbersome procedures. The pharmaceutical standards prescribed are impractical and more stringent than USFDA. Besides there is no single window clearance system in that country. There is a maximum selling price system known as Sales Exit Price which local firms circumvent by giving cash and volume discounts. Since foreign companies do not have similar practices, their sales are affected. (FICCI, 2007) Foundations of international trade. Current market size is US$ 2 billion and its exports are US$ 0.09 billion and imports are US$ 1.44 billion. Market is expected to expand by 4% per annum. South Africa being the largest market in Africa, it offers cost effective volume of sales to get products at competitive prices. Its imports of $ 1.44 billion is an indicator for opportunities to domestic and overseas firms to offer import substitution. Besides South Africa market is the most regulated unlike in the neighboring countries of Nigeria and Kenya with the there is a guaranteed recognition for quality. (FICCI, 2007) Conclusion South Africa being a developed nation 15 years ago but for only its whites’ minority population, the emancipated blacks majority can easily draw from the knowledge and infrastructure resources hitherto available to the whites. The strong will of the Government in implementing the Black Economic Empowerment program, should substantially contribute to the development of its Pharmaceutical Industry. Works cited Arora Vivek and Ricci Antonio Luca, “Trends in Employment and Unemployment Since 1994” Post-Apartheid South Africa: The First Ten Years; Chapter 3, 12 September 2008 Asia Pulse/PTI, Nov 19, 2005, “Indian drug firms have a field day in South Africa”, Asia Times online, 11 September 2008 “Pharmaceuticals & Health Care Report 2008”, Bharat Book Bureau, September 2008 Staff Report 2007, “IMF Country Report No 07/274, August 2007”, International Monetary Fund. The DTI, “South Africa’s Economic Growth” 12 September 2008 The DTI 2007, “Medium-Term Strategic Plan 2007-2010” Figures Figure 1 (below) Figure 2 (below) Figure 3 (below) Read More