The pharmaceuticals segment is facing a number of challenges

The continent’s largest drugs market, South Africa has a well-established pharmaceuticals manufacturing base that contributes 1.6% to GDP and employs 9600 people directly, and another 11,100 indirectly. Since 2009 pharmaceuticals spending has risen by a compound annual growth rate of 10%, from $3.01bn to a projected $4.9bn in 2014, according to sector information, services and technology provider IMS Health. Yet the segment has been struggling to maintain foreign investment. Against the backdrop of a skills shortage and regulatory uncertainty, pharmaceuticals companies are finding already tight profit margins further squeezed by rising input costs, government price caps and the weakening of the rand.

Market Composition

Government procurement of antiretroviral therapies (ARTs) is the fastest-growing segment of South Africa’s public pharmaceuticals market, according to the Department of Trade and Industry (DTI). Between 2008 and 2010 the government issued $421m in ART tenders, 84% of which were won by South African manufacturers, and in the 2010-2012 round it was $394m. The drop in value reflected the decline in the price per unit, while volumes doubled. In the 2013-15 ART tender round, the state will award $559m in ART contracts and $84m in anti-tuberculosis treatment tenders.

The private pharmaceuticals sector was valued at some $2.66bn by IMS Health for the year ending June 30, 2014, and accounts for 20-30% of drug consumption by volume, but 60-70% of the market by value. In the year ending June 30, 2013, it grew by 6.3% in value and 4.4% in volume, compared to growth of 9.6% and 7.8%, respectively, in 2012.

Import penetration of the market is around 65%, with domestic manufacturers providing the balance through 23 local makers of mainly generic drugs, ranging from globally competitive brands such as Aspen and Adcock Ingram, to medium-sized firms such as Cipla-Medpro and Ranbaxy, and a handful of micro factories. Multinationals Sanofi-Aventis, Novartis, GlaxoSmithKline, Johnson & Johnson and Fresenius Kabi have maintained manufacturing facilities in South Africa. Others – such as Merck, Sharp and Dohme – import medicines in bulk and package them at their local plants, while others maintain marketing and distribution networks in the country to sell pre-packaged imported drugs.

Imports 

Pharmaceuticals imports – excluding active pharmaceutical ingredients (APIs), which are used in locally made drugs – grew from $587m in 2002 to $1.84bn in 2012, 80% of which are medicines in finished-dosage form. South African producers also import 95% of APIs, including all of those used in the production of generic ARTs – mainly supplied by India and China – as well as packaging materials and other inputs. This makes local drug firms disproportionately vulnerable to currency fluctuations.

Local Production

According to the Clinton Health Access Initiative, there is insufficient installed manufacturing capacity to meet the projected increase in demand for ART APIs in 2015-17. Currently 90% of the 2.4m South Africans being treated for HIV receive first-line medications standardised by the government that are produced with APIs from India and China. The government strategy to increase domestic production will be boosted by plans to build a large-scale generics manufacturing plant, according to the premier of KwaZulu-Natal, Senzo Mchunu. In June 2014 Mchunu said that the government hoped to have the plant operational within five years.

“We have the land and the capacity to establish our own production plant to manufacture generic medicines which will be cheaper, more cost-effective, and will allow us to use the savings in other areas of need,” said Mchunu. However, there are other areas in which domestic involvement could be increased. “Localisation can also be done through knowledge-sharing, and research and development, rather than just setting up manufacturing,” Luciano Marques, the CEO of Novartis, told OBG.

Benchmarking

In May 2014 the Department of Health (DoH) announced a proposal to reduce the cost of medicines by benchmarking prices against other countries. It said that the scheme takes the pharmaceutical industry’s concerns into account, and that it plans to phase in the process in order to give the industry sufficient time to adjust. The new regulations are likely to have an effect on expensive drugs that are used to combat cancer, rheumatoid arthritis and other conditions requiring biologics. The DoH also said that measures were to be put in place to allow manufacturers to apply for an exemption for specific drugs. The countries to be compared in the benchmarking process are South Africa, Spain, Australia, Canada and New Zealand.

Reforms

In early 2014 two major legislative developments were in the pipeline that promise to alter the industry landscape. The first is the creation of a new independent pharmaceuticals regulatory body to replace the Medicines Control Council (MCC). The transfer of power to the South African Health Products Regulatory Authority (SAHPRA) has been widely welcomed by the industry. The second change, which is the Draft National Policy on Intellectual Property (IP) published in September 2013, is seen by many drug companies as a deterrent to much-needed foreign investment if passed in its current form. The proposed law would tighten up the registration of pharmaceuticals patents granted in South Africa, increase access to generics through licensing agreements and potentially cause prices to fall. As of October 2014 the draft law was still being finalised.

Current IP Regime

Two laws form South Africa’s existing pharmaceuticals IP regime: the Medicines and Related Substances Act (Act 101 of 1965) and the Patents Act of 1978. The patent registration office grants patent rights for a period of 20 years after an application is approved, without submitting an invention to substantive examination to determine whether it is new or non-obvious. Consequently, South African patents are inherently vulnerable, and there is no guarantee that they do not infringe on other patents granted nationally or internationally, or that they will be upheld in different jurisdictions.

The proposed legislation bolsters provisions for parallel importation and compulsory licensing to reduce medicine prices, and calls for the introduction of substantive examination and a mechanism for pre-approval challenges to all new applications.

Val Beaumont, previously the CEO of the Innovative Pharmaceutical Association South Africa, told OBG that the pharmaceuticals industry is supportive of much of the draft IP policy, but has concerns over key issues, such as the timeframe and human resource requirement that will be required to introduce substantive examination. “We envisage the same human resource and skills shortages as we see with other South African regulators,” she said. Clarity is also needed in how the policy will be implemented, as many of the proposals overlap with existing legislation. “A provision for parallel importation of pharmaceuticals in the Patent Act would give two different regulatory bodies the responsibility of adjudicating parallel importation,” said Beaumont. Both the minister of health and the national commissioner of patents currently have compulsory licensing authority under the 1997 amendments to the Medicines Act and the Patents Act, respectively.

While companies may harbour reservations about the new draft law, IP enforcement is largely irrelevant to potential investors when the average wait time to register a new drug with the MCC is several years, compared to just 18 months in the late 1980s.

SAHPRA

In recognition of the financial and human resource constraints that have undermined the MCC’s performance, the legislation presented to Parliament in March 2014 to create SAHPRA proposes a revised structure that ensures the new body would operate outside the civil service and gives the authority’s CEO the power to appoint the technical committees that will review new drug and medical device applications and make recommendations to a separate committee. “The streamlining of the licensing process under SAHPRA is a welcome development that will accelerate approvals and spur market growth,” the CEO and country manager at Pfizer, Brian Daniel, told OBG.

SAHPRA will be responsible for approving all new drugs, biologics and cosmetics, as well as medical devices, in-vitro diagnostics and complementary medicinal products, which were all previously unregulated. It will also have the authority to enter into cooperation agreements with other national regulators, in order to reduce duplication of evaluation of products that have already been approved in developed markets. SAHPRA was originally due to commence operations in 2013, but it is not expected to be up and running until 2015 at the earliest.

In addition, the minister of health announced the launch of a specialised institute of regulatory medicine with the Universities of Pretoria, Rhodes and North West, with the aim of bolstering the pipeline of qualified regulators. The first class enrolled in April 2014, being taught by retired regulators from agencies such as the US Food and Drug Administration.