Beware the bitter pill that may destroy all other pills

In A.D. 288, the Roman emperor, Diocletian, abdicated his throne after the economy collapsed and Rome was a scene of riots and chaos. Four years prior to his abdication, the emperor had begun to debase the currency by mixing base metals into the silver coins. With the currency worth less, prices started to rise as producers required more coins for their goods. In response, Diocletian introduced price controls and anyone impertinent enough to ask for a higher price was put to death. The natural response of producers was to stop producing, hence the economic collapse. There is an important lesson for government in this ancient tale.

In accordance with the medicines and related substances Act, the government recently published draft regulations relating to a transparent pricing system for medicines. The pricing of drugs is a mysterious business and I don’t claim to understand the intricacies of discounts and incentives that are offered to distributors and retailers by the various drug companies. But in attempting to make the system more transparent and to control prices, as well as profit, the government looks set to drive the pharmaceutical industry out of the country and to hurt the very people it seeks to help.

The regulations contain specific mark-ups that distributors, wholesalers and retailers of drugs may make. For instance, if a drug costs over R40, distributors and wholesalers may only charge R6. The draft regulations limit a pharmacist’s mark-up to a maximum of 24% on drugs costing under R100 and to R24 on any drug where the cost is more than R100. In the strange world of regulation, if some of the firms had got together and agreed to do what they are now being instructed to, they would have been found guilty of the uncompetitive practice of colluding to set ‘predator prices’ under the competition law.

The regulations also require a single exit price for all medicines from the manufacturer and as it stands, that price will be 50% of the current listed price for the drug. If the regulations are passed in their current form, drug producers will have to suddenly halve the prices of their drugs and pharmacists and distributors with any stock will suddenly find themselves with inventory worth half its previous value.

In addition to the price edicts, the regulations require drug companies to hand over detailed accounts of almost every aspect of their business, including information on the costs of developing, testing and marketing drugs. In the research-intensive world of drug development, these are highly classified details that no company is going to be happy about revealing and local subsidiaries will certainly not be able to prevail upon their foreign owners to allow them to part with the information. .

To call these regulations draconian would be a gross understatement. And yet many consumers will probably welcome the rules in the hope of far cheaper medicines. There may indeed be some short-term gains to some consumers, but the long term harm to the healthcare and pharmaceutical industries will be colossal. Instead of having all the drugs the consumers want at half the price, the price controls will do for us what merchandise price controls did for the Romans, ensure that we have only a fraction of the drugs that are now available.

South Africa is a tiny market for the major drug producers, normally accounting for less than 1% of global sales. Yet drug companies have been able to make acceptable profits in the country by being able to price discriminate; selling drugs at a good profit to the private sector while ensuring knock down prices to the state. Things have changed and the raft of anti-pharma legislation has contributed to a growing exodus of drug companies from South Africa. Since 1994, 22 drug companies have closed their manufacturing plants in the country. Some of these closures were due to mergers and some to a growing trend of manufacturing in centres of excellence around the world, but there are few companies that see any point in investing new capital in South Africa.

Selling a drug in South Africa, or any other country for that matter, is not a simple affair. If it is a new drug, a patent has to be sought and then the medicine has to be registered with the Medicines Control Council (MCC), which can take several years and result in considerable expense.

The effect of the mark-up rules on distributors and retailers will most probably mean that selling drugs in rural areas or in poor areas will no longer be financially viable. In attempting to increase access to medicines, the government will only ensure that good healthcare becomes the preserve of the wealthy in urban areas. The effects of the single exit price rules will probably mean that it will no longer be viable to register medicines in South Africa and we will simply miss out on the important future advances in healthcare that will be enjoyed by western nations.

If the government is truly interested in ensuring cheaper drugs with wider access for all South Africans, it should carry out some internal reforms instead of attacking the producers, distributors and retailers of drugs. The easiest and most obvious place to start would be to immediately remove the 14% VAT on medicines. If the regulations go ahead as planned, a R500 box of medicines will earn the distributor R6, the retailer R24 and the government a whopping R70.

The second area that needs drastic reform is the MCC. If a drug has been registered for use in the US, Europe and Japan, where is the sense in keeping it trapped in an expensive bureaucratic tangle while the government decides whether or not South Africans can have access to it? Apart from the expense, the government should consider the human misery (and possibly death) caused while patients wait for a committee in Pretoria to decide whether or not we can have a particular drug.

No doubt the government doesn’t want to create chaos and misery in the healthcare system, but like Diocletian before them, that is the probable result of their price control regulations. The drugs industry and indeed anyone who plans on getting sick in the future should reject these regulations out of hand.

Author: Richard Tren is a director of the health advocacy group, Africa Fighting Malaria and is a freelance writer. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\10 February 2004 - FMF Policy Bulletin 24 November 2009

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