Business: Pharmaceutical Sector Strongest Of Them All
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In its latest economic research, credit insurer Coface South Africa, says the fundamentals of the South African pharmaceutical market remain strong, and competition in the pharmaceutical sector continuing to be intense.
“The combined pressure of powerful market forces and legislation have eroded the profitability of this sector over the last decade, but the sector has remained buoyant as the demand from both private and public sectors have remained strong,” said Coface industry analyst, Wayne Basson.
The pharmaceutical industry operates in a highly legislated and regulated environment, which has posed a challenge for the industry.
The Single Exit Price (SEP) has been increased by 13,2%, effective from February for 2009 and this has impacted businesses positively in 2009. There is however still no resolution on what percentage the wholesalers need to apply to manufacturers for distribution and marketing services of medicine, said Basson.
Currently these are negotiated between the wholesaler and retailers and vary in percentage as there is no legislation governing them. Finally, the long debated doctors dispensing fees have been capped at 30%, up from 26% in 2008.
There are several growth drivers in the pharmaceutical industry which bear watching. The first is the increase in the use of generic medication. There has been an ongoing shift towards generics in South Africa.
Basson said volumes are increasing and generic medicines are currently estimated to have approximately 56% market share. This growth can be attributed to various factors, including economic pressures, a larger ageing population requiring chronic care and acceptance that quality, safety and efficacy are identical between the generic and the original products.
Generics have and will continue to grow faster than the branded pharmaceutical product market. In value terms, the generic market grew by 23% compared to the total private market which only grew by 13% over the past year. The drivers behind these growth levels include an emerging middle class, the expansion of the Government Employee Medical Scheme (GEMS) and high incidence of HIV/Aids. As such, competition in the generics market is intense.
The second area of growth in the pharmaceutical industry is related to Anti Retro Viral (ARV) treatment. South Africa’s government administers one of the largest budgets for ARVs on the African continent. There are estimated to be 5,7-million people infected with HIV/AIDS in South Africa. A further 1,1-million people need treatment and between 650 000 and 700 000 are on treatment (SA HIV Clinicians Society.)
The government awarded the ARV tender, estimated between R3-billion to R4-billion, almost exclusively to local manufacturers over a two-year period. Competition is expected to be fierce when the next ARV tender is announced by the government sometime in 2010.
The third driver of growth has to do with the greater tendency for people to self medicate during tough economic times. Hence there has been a shift from high to low-priced brands. Therefore the over-the-counter product range remains a strong focus area. Also over-the-counter products are not subjected to single exit pricing and thus remain a key growth area in the industry.
Finally the impact of the H1N1 or Swine Flu virus could help boost the pharmaceutical sector. This is largely dependent on the number of people being infected with it. It is reported that Singapore’s gross domestic product grew an annualised 18% in the second quarter of this year, owing to the country’s production of the drug Tamiflu, the main swine flu drug.
However, it would be difficult to predict the effect on the SA economy as the disease has not yet reach pandemic proportions in South Africa.
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