Healthcare-related shares on the JSE Securities Exchange South Africa have come under selling pressure in the past week, sparked by investor fears that company profits and margins will be unduly harmed by draft regulations from the South African government that would see the listed manufacturer’s selling price of all medicines cut by 50%.
Ultimately the proposals are aimed at reducing medicine prices for consumers by between 40% and 70% across the board and creating a more transparent pricing system in the industry.
Since the proposals were unveiled by Minister of Health Manto Tshabalala-Msimang on January 15, the share price of Aspen Pharmacare, a major supplier of branded pharmaceutical products and the leading producer of generic medicines in South Africa, has been pummelled, falling 17% or R2,20.
At the same time, Netcare and Medi-Clinic, whose hospitals and clinics sell medicines, have seen their share prices decline by 11% (or 55 cents) and 10% (R1,25), respectively. Afrox Healthcare lost 4,5% before recovering slightly.
Another loser has been health and beauty retailer New Clicks, which owns pharmaceuticals distributor UPD and a chain of 80 Link and Link Max pharmacies, and has just embarked on a substantial expansion plan to add pharmacy services to most of its 274 Clicks stores.
New Clicks shares lost 10% or 80 cents over the period-moving from R7,90 to as low as R7,10 on Wednesday — before recovering somewhat to R7,50 on Friday.
While analysts and investors, and those in the industry, had been expecting the regulations to impact negatively on healthcare groups, their broad nature (covering all medicines, from schedule 0 and up) and severity of the reduction in pricing (50%), took most by surprise.
Under the new proposals, which are supposed to be implemented from May 1 this year, the so-called “single exit price” for medicines is to be determined as 50% of the manufacturer’s net price (MNP) as published in the industry’s Blue Book of listed prices on January 15.
Wholesalers will be able to charge a maximum fee of 15% on medicines priced at less than R40, and a maximum R6 fee for medicines costing more than R40.
Dispensing pharmacies’ fees are limited to 24% of the single exit price for medicines costing less than R100, and R24 only for medicines costing more than R100. Non-pharmacy retailers can charge a maximum dispensing fee of 16%.
In a recent research report, Investec Securities retail analyst Roy Chapman concludes that the regulations in their current form are “unworkable” and “point to a disaster” for pharmacists, while noting that his research is based on some uncertain information.
According to his estimates, retail pharmacies would see their current gross margins of about 28% drop to an average of 16% (the actual amount depending on the medicine price), while also having to absorb the distribution fee.
For wholesalers and distributors, meanwhile, the draft regulations are “not good news, but no disaster”, Chapman says. They could see gross margins improve from a current estimated 8,5% to about 12%, but would still incur an absolute fall in gross profits due to the sharp reduction in overall sales levels. They would have to work to cut costs and increase volumes to compensate for some of these lost earnings.
For medicine manufacturers, the sharp drop in earnings margins that comes with the 50% reduction in the MNP could possibly make some of them (particularly the multinationals) reconsider the feasibility of their operations in South Africa, cautions Chapman.
Yet, as he notes, the draft regulations can be seen as only the first shot taken by the government across the bow of a pharmaceuticals industry perceived to be benefiting from extremely wide margins across most medicines.
Feedback from the industry and subsequent discussions are likely to be a lengthy process and could result in a less drastic reduction in the MNP or higher proposed fees in some areas, or a different pricing structure entirely.
Indeed, as the minister of health has stressed that the government’s intent is not to undermine the industry, the regulations in their final form could be very removed from this first draft.
Given the complicated nature of the industry, the finalisation process is likely to take several months, industry watchers agree, calling into question the targeted implementation date of May 1. — I-Net Bridge