International benchmarks for determining the prices of medicines

According to the latest Single Exit Price Application (SEPA) guideline for 2015, the Department of Health (DoH) is now “nudging” multinational pharmaceutical companies to disclose the prices of medicines they charge in foreign countries. This in an attempt to “name and shame” multinational companies that charge higher prices for their products they sell to the private sector in SA.

In 2004, the government introduced the Single Exit Price (SEP) mechanism which is applied to all medicines supplied to the private healthcare sector. SEP compels all manufacturers and importers to sell their products at the same price to all of their private sector customers, regardless of the size of the order, and prohibits them from offering any discounts. Not subject to the SEP constraints is the DoH which has a pricing committee that, by using a formula, recommends what the annual increase for the private sector should be.

Any discussion of drug prices in SA should take into account the price discrimination that has traditionally occurred; with drug manufacturers selling drugs at relatively high prices to the private sector and at greatly discounted prices to the state sector. The fact that manufacturers have been able to price-discriminate has meant that drug prices in South Africa are amongst the lowest in the world.

The DoH’s selected comparator countries include: Australia, Canada, New Zealand and Spain. However, the SEPA states, “Where a medicine does not have a comparator product from Australia, Canada, New Zealand & Spain all other countries where the medicine is being sold must be listed and provided as alternate countries”. But comparing drug prices around the world is notoriously complex and is often not even useful. Different regulatory regimes, disease burdens, demographic profiles, purchasing power etc, means that drug prices differ across countries for a number of reasons and direct comparisons do not necessarily provide evidence of greater or less consumer welfare in a given country.

Perhaps one of the most important and damaging long-term effects of drug price regulations, such as the SEP, is the impact they have on research and development. This impact is also some what difficult to measure and is often unseen because government and consumers are not aware of the lost innovation that would have taken place in the absence of price controls.

John Vernon of the University of Pennsylvania has estimated the impact of price controls on research and development. Using data from the 15 largest pharmaceutical manufacturing firms in the world, Vernon estimates several models of the determinants of research and development (R&D) over the course of a decade. The results confirm that pharmaceutical price regulation diminishes the incentives to invest in R&D. Moreover, the magnitude of the correlation is substantial (-0.07 to -0.20), suggesting that R&D investment is highly sensitive to the degree of pharmaceutical price regulation. The model predicts that investment in research and development could decline by up to 47 per cent as a result of price controls.

Government intervention in the pricing of medicines has already caused a major change in the way international pharmaceutical manufacturing companies view the SA market. Factories have been closed and full-scale local representation has been downgraded to agency representation. As a consequence, SA is not only losing out on potential local manufacture but also the participation of the withdrawing companies in finding solutions to ‘South Africa specific’ health problems, local research and development, local drug trials and the like.

With the chronic delays in drug registration, price controls, proposed IP laws that seek to legitimise the appropriation of innovative companies’ property, the introduction of a state pharmaceutical manufacturer and the general hostile environment toward any private sector participation in healthcare, pharmaceutical companies are probably feeling increasingly uneasy about their future in SA. The continued slow but steady disinvestment by innovative companies and lack of new investment in SA will likely continue unabated and probably accelerate. Why should innovative companies in particular invest in SA when other countries are much more accommodating and attractive investment destinations?

This reminds me of that (sick) old Soviet joke: Vladimir says, “The good news is that things are now so bad they can’t get worse”. Yuri says, “Oh yes they can”. Generic companies should also be wary. They are not necessarily exempt. The current focus on innovative companies is simply the thin edge of the wedge. Government has its own aspirations and a seemingly dogged determination to turn SA into a “developmental” state, in which state-owned enterprises are protected under the guise of “strategic assets”.

This article was first published in the March edition of Medical News.

Author: Jasson Urbach

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