The SA healthcare industry had an eventful 2023, starting with health minister Joe Phaahla announcing a 3.28% increase in the single exit price (SEP) of qualified pharmaceutical products.
In September 2023, a further 1.73% increase was announced. SEP is the price set by pharmaceutical manufacturers at which a medicine may be sold, including VAT and a logistics fee. Though the increases were welcomed, they were still deemed insufficient to fully offset inflation. Still, two of the biggest drug-makers in the country, Adcock Ingram and Aspen Pharmacare performed well on the stock market.
Adcock, which makes popular over-the-counter (OTC) products such as Panado, Corenza C and Allergex, saw its shares rise about 12% over the year. The firm, which is valued at about R9.7bn on the JSE, recorded 15% growth in turnover to R9.1bn, up from R8.7bn in 2022, while profit for the year increased 12.4% to R898m. Growth was driven by the launch of new products and the production of Norvatis’ ophthalmology products, which contributed a combined R300m in revenue. Earnings per share increased 12% to 561.3c. In addition, the company paid an annual dividend of 250c per share.
Aspen, which has a larger global reach, increased revenue by 5.5% in 2023 to R40.7bn, assisted by growth in turnover in Australia and increased demand for OTC products including pain and cold medications such as Disprin, Mybulen, and Solphyllex. The firm’s shares rose almost 50% on the JSE, though headline earnings per share declined 4% to R14.05 as a result of rising inflation, foreign exchange related losses, and a drop in Covid-19 vaccination sales.
Despite those positive performances, other pharmaceutical firms didn’t experience the same good fortune. Ascendis reported lower revenue for a fourth straight year as the group sold subsidiaries including Austell Pharmaceuticals for R440m. The group also sold its Cyprus-based pharmaceutical business Remedica in 2021.
Those sales are part of the group’s strategy to become debt free with its total senior debt settled after the disposals. In its effort to hasten its restructuring plans and unlock value for its shareholders, the company also announced its intention to delist from the JSE and the associated regulatory requirements in a bid to speed up its transition.
A consortium led by ACN Capital issued a R250m guarantee to buy out shareholders and delist the company, though the move could dent sentiment towards the sector and lead to reduced investment.
The NHI effect
Most conversations in the sector were focused on the National Health Insurance (NHI) Bill which was passed by the National Council of Provinces in early December. The proposed legislation, which now only requires President Cyril Ramaphosa’s signature to become law, has raised concern across the industry value chain.
Lobby groups Business Unity SA (Busa) and Business for SA (B4SA) announced their intention to file a formal petition that the bill be revised on the constitutional grounds that it may delay access to universal healthcare.
The groups also foresee disinvestment in the sector, further damaging an already fragile economy. Practitioners affiliated with the Solidarity Doctors’ Network have threatened to close their practices should NHI be enacted in its present form.
Medical insurance companies are similarly sceptical of NHI. In a recent Business Day interview, Discovery Group CEO Adrian Gore said the bill in its current form would reduce the amount of money available for healthcare, discourage investment and obstruct co-operation with the private sector. In addition, the bill is an existential threat to medical schemes and the private healthcare sector — the biggest buyer of pharmaceutical products.
Despite those concerns, the health department remains determined to roll out NHI. According to the department, 83% of the population receives healthcare, including prescription drugs, from the public system. However, the public sector accounted for less than 20% of the country’s total pharmaceutical purchases (R10.4bn in 2022). That could be due in part to differential pricing, whereby pharmaceutical companies offer their products to the private sector at a higher price.
In terms of pharmaceuticals, most public sector spend is directed towards programmes such as Covid-19 vaccines, HIV/Aids treatment, tuberculosis prevention and control, and childhood immunisation. On that basis, one of the NHI’s aims will be to improve access to drugs for ailments beyond those programmes.
According to the department, the NHI will have significant purchasing power as the sole buyer, which could result in more affordable pricing for pharmaceuticals accessed through both the public and private healthcare sectors. However, lower pricing for pharmaceuticals suggests lower earnings for suppliers (local and international), particularly those that serve SA as a primary market.
Region offers some sustenance
Despite these issues, there are some developments that could help overcome the challenges associated with NHI.
As an example, Aspen signed a production contract with Novo Nordisk of Denmark that will see Novo’s human insulin produced at a reduced cost at Aspen’s Gqeberha sterile manufacturing plant to fulfil African tenders.
Distribution of the insulin produced in SA will start at a fixed price of $3 (about R55) per vial. Under the contract Aspen will manufacture insulin to meet the annual needs of 1.1-million people with type 1 and type 2 diabetes across the continent. That could well offer sustainable revenue growth for Aspen and capacity utilisation at its R10bn plant, which was developed during the pandemic to produce Covid-19 vaccines but has since changed as a result of low demand.
In addition, Aspen signed a R773.9m deal with Eli Lilly to market and distribute various of the US pharmaceutical group’s medicines in Sub-Saharan Africa.
While such deals will provide some respite for shareholders, other concerns besides NHI are expected to persist. They include sustained economic decline, rising fuel prices, reduced disposable incomes and healthcare spend, and a weak and volatile rand. Still, expansion in Africa could be a strategy that could bolster returns for SA businesses over the next four years.
Higher demand is expected from the rest of the continent from the likes national government health departments. For example, a recent memorandum of understanding between the Egyptian Drug Authority (EDA) and the SA Health Products Regulatory Authority (SAHPRA) to facilitate pharmaceutical trade between the two nations by removing some non-tariff trade barriers could benefit SA pharmaceutical companies.
• Mukorombindo is an associate at Birguid and has worked in various industries including banking, automobile, financial services, healthcare, pharmaceuticals, and education. Across each of these industries, his interests include the address of social issues, technology and human interaction, marketing, opportunity research and business strategy.
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