Pharmaceutical manufacturer Adcock Ingram has warned investors that profit margins on its portfolio of medicines that are subject to government price controls will remain under pressure, despite the “top up” increase announced in July.
Health minister Joe Phaahla agreed to a rare mid-year price increase for private-sector medicine sales in July, allowing companies to raise the single exit price (SEP) of eligible products by up to 1.73%, on top of the 3.28% increase announced last December. The “top up” increase, which would take effect in September, was a welcome development but was still not enough to completely offset inflation, said Adcock Ingram CEO Andy Hall.
“If we look at the combined adjustment, it is still below input inflation and the consumer price index for the past 12 months, so we can expect quite a bit of margin pressure on the regulated basket,” he said in a virtual presentation.
The SEP is the price of a medicine at the factory gate and includes a logistics fee to cover the costs of transporting and storing the goods as they move through the supply chain. All customers, regardless of the volume they purchase, are charged the same SEP, so any price adjustments are felt throughout the healthcare industry. It is usually adjusted only once a year.
For many years, the pharmaceutical manufacturing industry has complained about the uncertainty surrounding the SEP increases permitted by the minister, saying they deviated sharply from the figures that they calculated with the government’s own formula.
“We have consistently said they should either apply the formula or apply CPI so we have some consistency and we can plan,” Hall told Business Day.
More than half (57%) of Adcock Ingram’s portfolio by revenue is subject to the SEP, said Hall.
The company, valued at about R9.1bn on the JSE, reported a 15% increase in turnover to R9.1bn, up from R8.7bn in 2022, while profit for the year rose 12.4% to R898m, up from to R801m in 2022. Headline earnings per share, rose 12% to 561.3c, up from 502c in 2022.
Growth was achieved despite SA’s challenging economic environment, the weak currency and increasing pressure on consumers’ disposable income, said Adcock Ingram.
Hall said the company had benefited from its large portfolio of defensive products, which enabled it to mitigate against the weaker exchange rate and higher input costs by increasing prices of its non-SEP regulated goods.
“Volume growth came from our OTC (over the counter) division, and the defensive part of our prescription portfolio, which saw the Novartis deal contribute an extra R200m in revenue, and five new product launches that brought in an extra R100m,” he said.
The opthalmology products from Novartis are not subject to SEP regulation.
Adock Ingram declared a final dividend of 125c bringing the total payout for the year to 250c, a 17% year-on-year increase.
The company, which owns popular brands such as painkiller Panado, flu treatment Corenza C and allergy remedy Allergex, said earlier in 2023 that it was considering possible acquisitions to expand its range of products to ones that were not subject to government price controls.
Hall said the company was still scouting for potential products to add to its portfolio.
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