Revenue earnings for drugmakers will remain limited in Sub-Saharan Africa (SSA) despite lax pricing rules due to high out-of-pocket (OOP) spending in SSA, which raises questions about affordability, according to Fitch Solutions.
Practically, apart from developed pharmaceutical markets in the region such as South Africa and Mauritius that offer stricter pricing controls, the rest of the markets offer lax pricing controls. This means that drugmakers operating in these markets will experience downward pressure on revenues.
“Although the majority of countries in the region offer a lax pricing environment which is favorable for drugmakers, it is our view that benefits to multinational drugmakers will remain limited given the high out-of-pocket (OOP) spending in SSA, which raises affordability issues.”
Fitch
According to Fitch Solutions, the pharmaceutical pricing environment in SSA remains largely unregulated, reflective of the nascent nature of the region’s regulatory environment. In SSA, drug prices are controlled mostly by market forces, with government tariffs, taxes and distribution markups accounting for a significant proportion of the final prices.
That said, drugmakers are unlikely to set high prices for their products, and this will still make SSA a less attractive destination for pharmaceutical investments. Based on Fitch’s Innovative Pharmaceutical Risks/Reward Index, almost all SSA markets are ranked very high in terms of ‘Pricing Regime’ which is reflective of the free pricing environment in the region.
Tighter Pricing Controls in SA and Mauritius
However, the exception is South Africa and Mauritius, which are ranked at the bottom of the index. The more developed regulatory regime in these two countries enables the government to ensure greater monitoring of drug prices. Therefore, drugmakers will experience tougher pricing controls and greater scrutiny in these markets.
In South Africa, the local pharmaceutical pricing environment is tightly regulated and based on a single exit price (SEP) system- which states the maximum price that drug manufacturers are required to sell their products.
“We note that this has previously impacted local drugmakers who have suffered as a result of the weakening rand, which increased the cost of imported raw materials used in manufacturing processes. Although the government adjusts the SEP rates on an annual basis, this is mainly linked to inflation, which is not so beneficial for drugmakers.”
Fitch
In Mauritius, pharmaceutical products are also under price controls enshrined in the Consumer Protection (Price and Supplies Control) Act. The maximum mark-up applicable to pharmaceutical products is currently 35.0% on landed cost.
This mark-up includes a wholesale margin of 11.0% and retail margin of either 21.6% on wholesale price or 24.0% on landed price. An allowance of only 2.0% is given on Cost, Insurance and Freight (CIF) to importers to meet clearance charges, marine charges, processing fee and transport.
Although multinational drugmakers are able to set high prices for their medicines in SSA, affordability issues limit how high these drugmakers can set their prices. Indeed, funding remains a recurring issue in SSA, with pharmaceutical spending very little in most countries and out-of-pocket spending remaining very high.
For example, Fitch estimates that pharmaceutical sales in the region account for only around 1% of GDP, while out-of-pocket spending is estimated to average around 30% of total health expenditure. Countries such as Nigeria, Cameroon and Sudan are estimated to have out-of-pocket spending of as high as 70%. This will therefore prevent drugmakers from setting high prices in the region, limiting drugmaker revenues and profits.
Furthermore, Fitch noted that the issue of affordability has only worsened after the pandemic. This has triggered decline in disposable incomes in the region with rising unemployment and high inflation which has also eroded purchasing power, and consequently the ability to purchase medicines in SSA.
