Country Report: South Africa - Pharmaceutical Executive


Country Report: South Africa
Leading the Pharma Model

Pharmaceutical Executive


In 2011, the Department of Health Care released a draft of new legislation that would make South Africa the first country in the world to introduce a maximum logistics fee. As distributors await its implementation, questions arise about how it might impact business going forward.

"As we are moving into 2012, what are the upcoming logistics fees and regulations going to do to compromise small to medium players in the wholesale channel?" says Dr. Iain Barton, CEO of RTT, a logistics services group specializing in the delivery of essential medicines to developing markets.

"We are now moving into a phase where the wholesalers become the big risks. Have they got the financial wherewithal and the economy of scale to survive regulated logistic fees? In our opinion, a lot of them do not," Barton says.

South Africa's distributors have faced a number of challenges in the past few years. Perhaps one of the biggest has been delivering needed essential medicines from city hubs to remote, isolated areas in short timeframes. Great progress has been made in this domain, mostly thanks to the inroads that specialized distributors made in the country.

South African-based pharmaceutical distributor UTi Pharma Africa prides itself on its far-reaching and timely service. Rob Botha, vice president of UTi Pharma Africa, says, "Our footprint, both through our own network and through the extended network of the broader UTi, is sufficient to make sure we can cover every location within the country's borders. We can service over 97% of our customers with a next day delivery, while the balance is serviced within 48 hours.

In recent years, another major challenge distributors have had to face has been the Single Exit Price (SEP). Part of the country's national drug policy, the SEP sets the selling price for all medicines registered for sale in the private sector. It's the price that leaves the manufacturers site until it reaches the pharmacy or prescribing physician.

Botha explains that although UTi Pharma has not been affected, the SEP can present challenges to distributors. He says, "The current concern with SEP is how annual increases are calculated, using the exchange rate as one of the elements. Quite frankly, from our perspective, operating within the borders of South Africa, the exchange rate is irrelevant, although I do believe that the government will entertain alternative ways of calculating the logistics fee portion to satisfy our local cost drivers."

As is the case in other parts of the South African pharmaceutical industry, distributors have to adapt to the SEP and any eventual fluctuations. SEP increases, although rare, have a significant impact on the distribution industry. "Obviously, a lot of our growth comes through the SEP increases of the manufacturers," Botha says. "Nonetheless, for distributors as well as elsewhere across the South African pharmaceutical value chain, the often-heard complaint is that the SEP increases are determined through fluctuations in the exchange rate."

Some say that the SEP limits the space where pharmaceutical companies can develop a competitive edge. "If one looks at the manufacturer and takes the classic 'Four P's Model' (Product, Price, Position and Promotion), in a world of generics medicines, which the South African market is more and more, everyone has the same product," Barton explains.

"Therefore, product is not a differentiator. In a world of SEP regulation, price is not a differentiator, and with the section 18A of the Medicines and Related Substances Control Amendment Act, which says you may not promote, promotion cannot be a differentiator either."

The South African government passed the aforementioned bill in 1997 in an effort to improve access to essential medicines in the country. According to Section 18A, "No person shall supply any medicine according to a bonus system, rebate system or any other incentive scheme." Some industry actors find such laws challenging when it comes to business development.

For distributors, this environment has driven them to focus on position, channel management, and integration with the front end in order to assist with the demand generation and fulfillment. For this reason, RTT's last acquisition was 3D Marketing, a sales and merchandising business and key account management organization that assists with demand creation on a contract basis.

Beyond that, RTT developed its consumer health business, which led it to win the GSK consumer health account. Today, the company is the biggest specialized service provider in over-the-counter products. RTT follows its clients into East and West Africa, as it believes in steep demand increases across the continent. "There is a bourgeoning private market. As the GDP of the country grows, as the percentage of healthcare expenditures of GDP grows, and as the emerging middle class moves into discretionary spend, the healthcare demand expands," Barton explains. "The most important thing that we have focused on is extending the service set, so that we provide an 'end-to-end' solutions set for the client base."

In terms of the company's growth strategy in South Africa and beyond, Barton says, "South Africa is a market of fast followers. We are fast leaders in some respect, as RTT, but we are also fast followers. We are leading the market in providing infrastructure capacity but we are following the market expansion that we are seeing through the client base as well."

UTi Pharma in turn is going forward by building an R530 million (or about $67 million) warehouse and distribution center four times larger than their current facility, with the ability to expand to five and a half times its size. Part of the rationale behind the flexible expansion is the uncertainty about the influence of National Health Insurance (NHI) on the business. "We believe that a successful National Health Insurance (NHI) will require close partnership between private and public infrastructure, and this should be good for our new facility, although obviously there is still a bit of uncertainty as to what type of impact NHI will have on our business, and by when," Botha explains. Construction is scheduled for completion in 2013.

UTi Pharma has experience working with the government and hopes to continue collaboration with the government as NHI is implemented. Botha says, "We have tried and tested supply chains, and we are probably one of the largest suppliers of pharmaceuticals direct to the government, so we understand how to operate with them and we understand the challenges they face. We have already entered into a partnership with the Western Cape government, whereby we are responsible for the direct supply of chronic medicines to hospitals and patients in that province."

South African distributors have had to be reactive to what has been an evolving national drug policy. From new legislation on logistics fees to the implementation of the NHI program, ongoing changes mean that industry leaders must stay alert and ready to adapt to remain successful in South Africa's healthcare environment.


blog comments powered by Disqus

Source: Pharmaceutical Executive,
Click here