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Pharmaceutical manufacturer Adcock Ingram is pursuing potential acquisitions to expand its range of products that are not subject to government price controls, CEO Andy Hall said on Tuesday.
The company is facing increasing margin pressure on its portfolio of medicines governed by the health department’s Single Exit Price regulations, after health minister Joe Phaahla announced a below-inflation price hike for 2023. The Single Exit Price regulations control prices at every step of the supply chain, from factory gate to pharmacy checkout, and permit an annual price hike which the minister this year set at 3.28%.
The below-inflation increase caught the pharmaceutical industry on the back foot, as it was about half the level it had anticipated based on a formula set out in the Single Exit Price regulations. Previous Single Exit Price increases have been broadly in line with the consumer price index (CPI), which came in at 6.9% in January.
“If we are going to sustain margins and be able to cope with cost input pressures, we have to keep building our non-regulated portfolio,” Hall said when the company released its interim results for the six months to December 31. Margin compression on price-regulated products was as much of a worry as the state of the SA economy and load-shedding, he said.
More than half (56%) of Adcock Ingram’s portfolio by revenue was comprised of medicines subject to the Single Exit Price, said Hall. “It’s the vast majority of prescription and the majority of our over-the-counter and hospital products.”
SA’s umbrella association for drug manufacturers, the Pharmaceutical Task Group, has written to the medicines pricing committee that advises the minister to ask for an explanation of this year’s adjustment. “In our view it is not reflective of consumer price inflation or the formula previously used in the regulations,” said Hall, adding he was not optimistic the figure would be changed.
Adcock Ingram reported an 8% increase in revenue to R4.68bn, up from R4.35bn in the corresponding period the year before. Headline earnings per share rose 19.6% to 289.9c, up from 242.3c the year before. A more favourable product sales mix and price hikes in the group’s non-Single Exit Price portfolio had mitigated the increased costs due to a weaker exchange rate, increased production costs and a “significant cost-push” from suppliers, it said.
Adcock Ingram has four divisions — prescription medicines, over-the-counter medicines, hospital products, and consumer goods such as baby wipes and sunblock. Its consumer division was its best performing unit, reporting a trading profit of R185m, compared to a trading profit of R167m in its prescription business, partly because it had been able to put through a 10% increase in prices, said Hall.
In line with many other large manufacturers, including rival Aspen Pharmacare, Adcock Ingram has negotiated with local municipalities to minimise power cuts to its facilities. For example, Johannesburg City Power had exempted Adcock Ingram’s Aeroton plant from load-shedding, said Hall. However, the site, which makes hospital products such as intravenous drips, remains vulnerable to electricity infrastructure failures, which have a knock-on effect on water supplies. The site has two boreholes, but their daily yield is less than the facility’s requirements, he said. Adcock Ingram spent R25m on diesel to power generators in the past six months, he added.
Hall said trading conditions were expected to remain challenging as consumers faced higher transport, electricity, food and borrowing costs. The best thing finance minister Enoch Godongwana could do for the pharmaceutical sector in his budget on Wednesday was to deliver news that improved the purchasing power of consumers.
“Anything he does to benefit the average consumer will benefit Adcock Ingram, as it is all about consumers having money in their pockets,” Hall said.
Adcock Ingram declared an interim dividend of 125c.
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