The effect of the drug price intervention on retail pharmacies in South Africa
Dodd, Stanley Anthony
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In May 2004 there was a shake-up in the private pharmaceutical industry in South Africa. The National Department of Health (DOH) introduced a form of price control which for the first time attempted to regulate prices at every level of the pharmaceutical distribution chain. The price controls was immediately challenged and was not properly implemented until partially upheld by the Constitutional Court at the end of 2005. Throughout 2006 the DOH (through the Pricing Committee) reconsidered parts of the price controls, dealing with an appropriate dispensing fee for retailers, which were struck down by the Constitutional Court. In late 2006, a new dispensing fee was published and then immediately challenged. The DOH claims they had to do this to make sure that medicines remain affordable, and pharmacists at the end of the day get a reasonable income from each price band. The United South African Pharmacies (USAP) and the Pharmacy Stakeholders1 Forum (PSF) claim that implementation of the price controls would have pharmacies not being able to cover their expenses. The objectives of the study are to ascertain whether the price controls forced upon the healthcare industry by the DOH of South Africa is viable in small retail pharmacies and what the impact will be on small retail pharmacies and their communities. The actual annual income statements for 2006 of three typical pharmacies were obtained. The next step was to determine the effect that the price controls would have had on the total sales and key financial factors in the income statement if the price controls was already in force in 2006. A revised experimental income statement was then created for the pharmacies. The experimental statements were then compared to the actual statements to determine the effects of the price controls. The comparison showed that all the pharmacies were following the same trend and had a decrease in net profit. Two of the pharmacies would have had a net loss for the year while the third will continue to show a net profit although much lower. This net profit decreased from 7% to 3% following a decrease in gross profit (GP) from 33% to 30%. The GP of the front sales shop remained unchanged, while the GP percentage for the dispensary decreased by 5% from 30% to 25%. The DuPont model showed that the Return on Equity (ROE) decreased from 83% to 33%. Drug price regulations could force many pharmacies into bankruptcy and ensure that the distribution of drugs to rural and remote areas will be financially impracticable. Once in place, the drug price regulations are likely to become ever more complex and onerous to comply with. The price regulations may end up reducing price competition among manufacturers, and in the long run, will harm the consumer by fixing prices above what would otherwise have been achieved in an open competitive market. The drug price regulations distort the normal market clearing process and effectively increase demand for medicine without providing the economic incentives that serve to match demand with supply.