National Association of pharmaceutical Manufacturers
17 September 2002
The Portfolio Committee on Health
Honourable Members of Parliament

COMMENTS ON BILL TO AMEND THE MEDICINES & RELATED SUBSTANCES ACT, 1965,
as amended

We appreciate the opportunity to comment on this Bill. Our voice represents the very backbone of South Africa’s pharmaceutical industry, i.e. the generics industry and local manufacturing interests. Both these issues are of enormous importance if we are to maintain a viable pharmaceutical industry as a national asset. It is also, interestingly, in line with clear, stated objectives contained in the National Drug Policy.
We do, however, have concerns, not about the intended policy objectives, but rather the way some of the legislation is written and therefore its practical implementation.

The Bill does not address many of the issues raised by the NAPM in its submission to the Honourable Minister of Health in August 2001 and we have therefore attached a copy of this to you for further assessment.

The most important features of this submission are:

1. Pricing Committee
The business processes and terms of reference of this committee has not been defined and
published for public comment. In the absence of this information, we cannot determine the impact on the healthcare environment.

2. Single Exit Price
Banning legitimate trade practices such as volume discounts may be anti- competitive. We therefore propose that the terminology ‘Single Exit Price’, be changed to "Net Price". This will allow for volume discounts as an ‘on invoice’ item. Volume discounting is an acceptable trade practice in all spheres of business. This will also serve to lower the cost of medicines to the patient.

The Department of Trade and Industry’s comments regarding pricing need further consideration. "Single Exit Price" needs to be defined.

3. Pharmaceutical Wholesalers
The intention that the Pricing Committee will set an appropriate fee to be charged by wholesalers and distributors may be anti-competitive. We suggest that this be based on a maximum percentage. This will then allow room for wholesalers to be competitive and offer lower costs. This can be shown as a separate item on invoice and will, therefore not disguise the ‘net price’.




4. Marketing Code of Practice – Section 18c
This Code of Practice needs to be published for its 90-day comment period as required by regulation. This could delay implementation of the Act until that period is complete, as the current requirements does not allow for sub-sections of the Act to be implemented piecemeal. We suggest that this be reviewed within the Parliamentary framework.

We recommend the following changes to the wording:
The Minister shall, after consultation with the pharmaceutical industry and other stakeholders, make regulations relating to a Marketing Code relating to the marketing of medicines.

Section 30 Penalties
The penalties listed in Section 30 may not be appropriate for infringements of the Marketing Code. Other penalties may be more appropriate, such as:
A letter of withdrawal of false, misleading or unapproved claims to be sent to healthcare professionals.
A withdrawal/apology to be published in appropriate journals or other publications.

We thank you for this opportunity and should you have any queries or require further information, please do not hesitate to contact us. We would avail ourselves for any further discussions with you on this matter and, in fact, will appreciate some direct interaction with you to discuss these issues further.

Thanking you in anticipation



Impact of Act 90 on the Industry

CONTENTS

The Value Chain
Industry Standards
Extremists Interventions
Proposed Pricing Model
Intellectual Property
International Tendering
Impact On Industry
Result
Conclusion

THE VALUE CHAIN FOR PHARMACEUTICALS


The Value Chain
Note PMG: diagram not included
As can be seen from the diagram above, manufacturers are very much at the back-end of the pharmaceutical value chain. Between the pharmaceutical company and the end user and finally, the funder of medicine there is a myriad of people involved; the wholesaler and/or distributor, the doctor, the specialist sometimes, the pharmacist and ultimately the patient and/or medical aid administrator and finally, the medical aid scheme.

To address therefore the price of medicine, focus can not only be at the manufacturer level. In fact, the fact is that in the last five years, there has been an enormous amount of competition between generic manufacturers, reflected by the growth in volume of generic pharmaceuticals in South Africa (an almost doubling in the last five years from about 12% to about 33%) and an increase in value by only about 1%. This does point to the view that there has been a huge loss of margin along the pharmaceutical value chain caused by other participants or stakeholders in that value chain.
We therefore support a transparent net pricing system to benefit the end-user or funder of medicine so that the advantage of competition between manufacturers and suppliers of drugs are passed on to the funder and does not get lost in the value chain.

INDUSTRY STANDARDS


Highlighted issues affecting current industry standards
High Costs
It is true that the current perception in the industry is that the costs of our medicine in South Africa are high. The question is whether the costs are high because of the inefficient value chain or because of excessive profiteering.
Perverse Incentives
The one issue that mostly gives a negative perception of industry standards is the one of perverse incentives. It is a fact that the industry on its own has failed to bring control to perverse incentives. Largely, this is because of the lack of a robust framework to deal with perverse incentives and the fact that sometimes the pressure to perversely incentivise lies outside of the manufacturing industry. It is a fact that the NAPM as a representative body of pharmaceutical companies failed in ending the practice of bonusing and sampling, even though our members committed to do so in writing, because doctors and other providers threatened not to buy from our members if goods were not supplied on bonus. These doctors would then claim full reimbursement for these goods from the medical aid, thereby not driving prices of medicine down and defeating the efforts of pharmaceutical companies.

Legislation impact on industry standards
There are three aspects of the new legislation that would have a very positive impact in dealing with falling industry standards and which the NAPM favours and supports. These three aspects are:
Generic Substitution
Pharmacists and other dispensers of medicine will now be forced to educate patients about the benefits of generics, which are more cost-effective than most of the patent medicine.
The introduction of a Professional Fee that would support the dispenser supplying a generic or a more cost-effective medicine as the incentive for more profit based on the current profit margin charged by the dispensers will have been removed. This would therefore promote the supply of a more cost-effective drug and would therefore bring the price of medicine down. We see this as a positive intervention in the new legislation.
The Marketing Code of Practice contemplated in the amended legislation will assist industry in dealing with perverse incentives. We have always supported a model, which is self-regulatory by and large with necessary teeth to apply sanction when industry initiatives fail. A legal framework will also be all-encompassing in dealing with stakeholders outside of the manufacturing industry.

Conclusion
The above interventions are positive and implementable and will go a long way to re-inforce industry standards.


EXTREMIST INTERVENTIONS

Unfortunately, in the new proposed legislation there are various aspects that have been added that could have the opposite effect in trying to achieve objectives of the National Drug Policy and also goes contrary to Government’s macro-economic policies. These are listed hereunder:

Ban on Bonus, Rebate or other Incentive System
The NAPM supports the transparent pricing of medicines. For this reason invoices need to be detailed and accessible and the professional fee must be well publicised.
A clear distinction needs to be made between legitimate trade practice and perverse incentives. Volume discounts is an example of one such legitimate trade practice and must be allowed. Not to be able to operate like this takes the freedom of doing business away from the industry. This is unacceptable and impractical given the current trade practices within the industry. There is no business sense to deny me the right to charge less to a customer that takes a thousand bottles of medicine as opposed to a customer that buys one bottle of medicine.
It is for this reason that we support a Marketing Code of Practice that will regulate perverse incentives but will allow legitimate trade practices.

Pricing Committee

The NAPM supports a transparent pricing system but does not believe that the pricing committee as constituted in the present legislation would be the most appropriate forum. Price Control is in conflict with free trade principles, which is the current government’s macroeconomic policy and may be anti-competitive. The NAPM recommends that there should be a moratorium on this Section of the Act. This will allow time for the following to be formulated and/or defined for further discussion and comment:

Clarification of the Pricing Committee’s terms of reference, scope, modus operandi, "business processes" and monitoring of such a committee.
Composition of the committee to be representative of all
stakeholders. This will enunciate the democratic principle of "Those who govern must represent those who are governed".
Implementation of the Code of Marketing Practice could also fall within the scope of this committee and issues such as monitoring perverse incentives.

Single Exit Price

The definition of ‘single exit price’ should be changed to read ‘net price’, which would allow volume discounts. This would allow for volume discounts which should be permitted on the basis of an ‘on invoice’ item to meet the requirement of transparency. As stated previously, this is an acceptable business practice, which will serve to lower the cost of medicines to the patient through increased competition. Some of the problems with Single Exit Price are listed hereunder:

Limits free trade, may be anti-competitive and allows price setting.
No differentiation, no competitive advantage and therefore anti-competitive.
Ignores the wholesaling function and if a set margin is introduced for the wholesaler, this will again be anti-competitive.
Limits accessibility of lower schedule drugs which is against key principle of the National Drug Policy

Schedules 0-2 medicines (inclusive) should be excluded from the single exit price (net price) system because a professional fee would have the effect of increasing prices of such medicines, which are available, over-the-counter in retail pharmacy. Further, Schedule 0 medicines are sold through general stores and by food distributors/wholesalers to spaza stores that serve the needs of remote rural communities as well as urban environments and provide a service to the community by widening the distribution of Schedule 0 medicines. These outlets could not charge a professional fee and would discontinue selling such medicines without some profit incentive.

Omnibus Clauses

The Minister’s and DG’s opinion as mentioned from time to time in the Act and the Regulations must be a logical one. For this reason the process of arriving at an opinion must be set out for the sake of transparency and good governance. The NAPM feels strongly that the process allowing for the Minister and DG to make decisions must be regulated and should therefore be covered in the regulations under those respective clauses.

PROPOSED PRICING MODEL

Any proposed pricing model must take the following principles into account:
Transparent pricing system
Mixture of Self-Regulation and Government intervention - mixed
committee (All Stakeholders, including Funders) within marketing code of ethics, to track perverse incentives
Leverage existing infrastructures, Inspectors of the Pharmacy
Council and MCC
Net Pricing mechanism as opposed to a Single Exit Price

INTELLECTUAL PROPERTY


South Africa is a member of the WTO and we expect would keep its trade obligations within that framework.
The Multinational companies have a concern around Parallel Importation and as long as adequate controls are in place to protect the public it could be managed.
Registration should be stringent to avoid counterfeiting of medicines

INTERNATIONAL TENDERING


International Tenderers should be committed to having a local partner to ensure that mechanisms are in place to administrate Adverse Drug Reactions (ADR’s). product recalls and issues of safety, quality and efficacy. This will prevent international opportunists from capitalising on legislation to make a quick profit without any investment, commitment or legal responsibility.
As an industry we will be happy to compete internationally as long as the playing fields are level in that the same medicine registration process must apply and the same conditions as parallel importation must apply as well.

IMPACT ON INDUSTRY

Should one take each of the issues above and without weighting them in any way and score it either as a positive or negative one for every one positive or negative point associated with it, the impact it would have is illustrated by the diagram below.


Note PMG diagram not included
RESULT

The overall impact of this could result in South Africa as a country losing the pharmaceutical industry as a National Asset. In the short term, South Africa may be able to get some lower prices of medicine but this has medium to long-term implications of disinvestments, loss of employment and being held to ransom to price increases once we do not have an industry to defend ourselves with and we become a market for other countries to exploit.

CONCLUSION

Only by working together can we ensure the attainment of our goals to make medicine more affordable and accessible and thereby maintain this strategic industry as a national asset