Adcock Ingram and peers call for medicine price increase
The company says the weak rand is squeezing its margins
Local pharmaceutical manufacturer Adcock Ingram and its peers are lobbying the health department for an urgent midyear increase in medicine prices to offset a weaker rand, which is pushing up the cost of imports and squeezing profit margins.
Medicines sold in the private sector are subject to government regulations that usually allow for only one price increase a year, capped at a level set by the health minister on the advice of a pricing committee. But there are provisions in the regulations for the minister to grant an “extraordinary” increase when there is a sharp depreciation in the rand.
This year’s single exit price (SEP) increase, which came into effect in January, was set at 4.53%, broadly in line with consumer price inflation. Since then the rand has weakened significantly against the key currencies in which imported finished goods and active pharmaceutical ingredients are denominated, including the dollar and euro. The rand has fallen almost 17% against the dollar since the start of 2020, after reaching a low of R19.35/$ in April.
The SEP is the ex-manufacturer price of a medicine combined with the logistics fee and VAT, and set at the same level for all private sector customers, regardless of the volumes purchased.
“In the absence of further relief on the SEP, margin compression in the group is going to be inevitable, given the current rates of exchange,” said Adcock Ingram CEO Andy Hall in an investor call shortly after the company announced its full-year results to June 30.
Adcock Ingram, which counts Panado painkillers and the cold and flu product Corenza-C among its brands, reported a 4% increase in revenue to R7.35bn, up from R7.08bn last year, but profit for the year fell 2% to R682m, compared to R697m last year.
Headline earnings per share, the primary profit measure in SA that strip out certain one-off items, fell 1% to 417.5c. Adcock Ingram benefited from consumers stocking up on painkillers and disinfecting products during the coronavirus crisis, but saw prescription volumes in its hospital division fall by 7% as patients deferred elective procedures and trauma cases fell during the lockdown.
The Pharmaceutical Task Group, an industry association for pharmaceutical firms, made its case to the pricing committee in July and requested an SEP increase of 4%, said its chair, Stavros Nicolaou. The requested increase is based on a formula set out by the health department, which takes into account consumer price inflation and exchange rate fluctuations. The pricing committee’s recommendation is now being considered by the minister.
Hall said Adcock Ingram was still on the acquisition trail, despite the uncertain trading environment generated by the coronavirus pandemic and the economic slowdown. SA’s economy is expected to contract by more than 7% this year, according to the Treasury and Reserve Bank.
“We are still on the hunt for personal-care or consumer businesses,” he said in an interview with Business Day. Adcock Ingram, which earlier in 2020 acquired the home- and shoe-care supplier Plush Professional Leather Care, sells over-the-counter and prescription medicines, as well as personal-care and hospital products.
Nevertheless, Adcock Ingram has opted to withhold dividends to preserve cash, taking a similar line to companies from sectors ranging from retail to agriculture. The last time it withheld dividends was in 2015, when it reported a half-year loss for the six months to December 2014.
“We think it [the trading environment] is too uncertain to not be extremely prudent and hold on to cash resources. We really don’t know what lies around the corner,” said Hall.
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