Pharmaceutical Industry: Department of Health & DTI briefing

Economic Development

28 June 2017
Chairperson: Ms E Coleman (ANC) and Ms L Dunjwa (ANC)
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Meeting Summary

The Department of Trade and Industry (dti) combined with the National Department of Health (DoH) to present an overview of the pharmaceutical industry, with a focus on the procurement of anti-retrovirals (ARVs).

The Dti provided a broad profile of the industry and indicated that the pharmaceutical market in South Africa was valued at approximately R45 billion in 2015. The private sector accounted for 84% of the market, and the public sector for the rest. Approximately 276 companies were licensed by the DoH and the Medicines Control Council (MCC) to import, manufacture, distribute or export pharmaceuticals. Domestic manufacturing pharmaceutical companies almost exclusively produced generic products, and were import dependent. In 2013, generics accounted for 63% of the private pharmaceutical market, and had an 80% share of the government’s pharmaceutical purchases. The value of locally manufactured pharmaceuticals exported in 2015 was R4.9 billion. The industry was dominated by very few key players, such as Aspen Pharmacare, Adcock Ingram, Cipla, and Sanofi, with the key input being active pharmaceutical ingredients (APIs).

The high demand for pharmaceutical products in the country, and the existence of API manufacturing in the country, was highlighted as a strength. Some key weaknesses included the high capital upfront costs required to invest and gain a competitive position within the market, which limited new entries; the significant dependence on imported APIs and finished pharmaceutical products; and the skills shortage (and the cost of specialised skills), which also affected the entire pharmaceutical industry supply chain, as companies were required to have a supervising pharmacist. It was estimated that SA required 12 000 pharmacists to meet the international benchmark of 50 pharmacists per 100 000 people. The main opportunity was local manufacturing capabilities in the niche pharmaceutical sectors, which could be leveraged to serve the growing market demand in the rest of Africa and globally. The key threats were economic conditions and the relative weakness of the volatile rand, which meant that APIs were more expensive and given the local Single Exit Price (SEP) mechanism, companies lacked the incentive to invest in local production facilities, as predicting future profit margins was difficult.

The Dti was in the process of formulating an industrial policy which would serve as a turn-around strategy for the SA pharmaceutical industry. However, major problems had materialised in the industry, included the 37 plants that had closed down over the past 15 years, and the fact that there was growing reliance on imports exacerbated the problems. In addition, there were structural imbalances and widening production capacity and technology gaps. These were some of the areas that would also be considered in the policy formulation.

The Department of Health said the total current estimated value of state pharmaceutical contracts amounted to R12.8 billion per annum, subject to price adjustments for foreign exchange fluctuations. There were 80 suppliers on contract across over 1 000 line items, and tenders or a total of 32 line items were awarded. Of these 32 items, one product – the fixed dose combination ARV TEE -- constituted 72% of the value of the tender, amounting to R10.2 billion. This contract was split amongst four suppliers, of which three were formulating the product locally, and had 72% of the contract. The majority (67%) of the awards went to locally produced ARVs. Awards for imported product were made mainly for ARVs where there was only a single supplier globally.

Members asked how the Dti intended to shift the future budget purchases in favour those countries that would allow South Africa to formulate lucrative partnerships with them on a 50/50 basis; why there was no “G” indicator (for good performance) in the scorecard regarding the performance of the companies in the provision of their services to the Department of Health; and what incentives were made available in the industry, as they seemed to be lacking. Other issues raised included the uncertainty in the policy environment and its implications for APIs and intellectual property; how the challenges were going to be addressed by the Department of Health; where was the country lacking the most in terms of the skills, and how best the departments thought the country could move forward to mitigate the shortages; the need for the Dti to partner with other departments to tackle the challenges jointly; and why advantage was not being taken of pharmaceutical training opportunities in countries like India and China.

Meeting report

Opening remarks

The Chairperson welcomed the delegation team and the Members of both portfolio committees, and advised the meeting that the committees had conducted a joint oversight visit to one of the pharmaceutical companies, Aspen, in the Eastern Cape. They had discovered issues around the supply chain and transformation within the sector, and had felt that there was a need to understand the skill aspect in relation to the NGP (New Growth Path) skills development programme in the sector. The committees had agreed that they needed to have joint meeting and request presentations from the people who were actively involved in the sector. The anti-retroviral (ARV) tender with Aspen had arisen as one of the critical areas that needed to be looked into during the engagements with the company.

Department of Trade and Industry on the Pharmaceutical industry

Ms Swasthi Soomaroo, Director: Pharmaceutical and Medical Devices, Department of Trade and Industry (Dti), said that the pharmaceutical market in SA had been valued at approximately R45 billion in 2015, of which the private sector accounted for 84% and the public sector for only 16%. Approximately 276 companies were licensed by the Department of Health (DoH) and the MCC (Medicines Control Council) to import, manufacture, distribute or export pharmaceuticals.

Domestic manufacturing pharmaceutical companies almost exclusively produced generic products, and were import dependent. In 2013, generics accounted for 63% of the private pharmaceutical market and had an 80% market share in government’s pharmaceutical usage. The value of locally manufactured pharmaceuticals exported in 2015 was R4.9 billion, and two local pharmaceutical multinational companies dominated the pharmaceutical manufacturing industry.

The key players in the industry were Aspen Pharmacare, Adcock Ingram, Cipla and Sanofi and their key input was active pharmaceutical ingredients (APIs). South Africa was ranked 46 globally for exporting pharmaceutical products, and 42 for imports.

She provided a SWOT analysis of the industry, and said the key strengths were the high demand for pharmaceutical products, and the fact that API manufacturing existed in the country. Key weaknesses included the high capital upfront costs required to invest and gain a competitive position within the market, which limited new entries; the significant dependence on imported APIs and finished pharmaceutical products; and the skills shortage -- and the cost of specialised skills – which affected the entire pharmaceutical industry supply chain, as companies were required to have a supervising pharmacist. It was estimated that SA required 12 000 pharmacists to meet the international benchmark of 50 pharmacists per 100 000 people, which was another weakness. The key opportunity was attributed to the fact that local manufacturing capabilities in niche pharmaceutical sectors could be leveraged to serve growing market demand in the rest of Africa and globally. The key threats were economic conditions in terms of the volatility of the rand, as the relative weakness of the rand meant that APIs were more expensive and given the single exit price (SEP) mechanism in South Africa, companies were dis-incentivised from investing in local production facilities, as predicting future profit margins was difficult.

There were also the following challenges facing the industry:

  • Absence of an integrated plan between relevant government departments regarding the local production of pharmaceuticals.
  • Efficiencies within regulatory bodies.
  • Price controls and the exchange rate volatility contributed to higher than normal API costs.
  • There was uncertainty in the policy environment.
  • There was a growing trade deficit in pharmaceuticals.
  • The lack of adequate incentives across the pharmaceutical value chain.

The Dti was in the process of formulating the industrial policy which would serve as a turn-around strategy for the SA pharmaceutical industry. However, the major problems that had materialised in the industry included the 37 plants which closed down in the country over the past 15 years, and the fact that there was growing reliance on imports exacerbated the situation. In addition, the structural imbalances and the widening production capacity and technology gaps, were some of the areas that would also be considered in the policy formulation.

Important points in the Dti’s industrial policy for the industry included building investors’ confidence by using government procurement to leverage local manufacture, and exploring means to boost exports and come up with a reasonable approach to the medicines pricing policy. The Dti would also focus on growing domestic capacity in the manufacture of key APIs for ARVs, anti-TB, biologics, reagents for in-vitro diagnostics via technology transfers, investment incentives, tariff protection and expedited regulatory approval processes. Lastly, the Dti would look beyond simple manufacturing by establishing alliances in research and development, and promoting clinical R&D.

Department of Health on Antiretroviral Procurement

Dr Yogan Pillay, Deputy Director-General: National Department of Health, commenced with an overview of the pharmaceutical industry, noting that the total current estimated value of state pharmaceutical contracts amounted to R12.8 billion per annum, although this was subject to price adjustments for foreign exchange fluctuations. There were 80 suppliers on contract across over 1 000 line items.

He pointed out the following factors that affected local production:

  • Access to appropriately skilled persons to develop production capability.
  • The availability of the physical infrastructure to produce a medicine.
  • Disease burden in the market.
  • Standards adopted by the national medicines regulator.
  • Economic incentives and disincentives.
  • Duties and import controls; and
  • Collaborative partnerships.

The overall criteria for the tender award in 2015 covered the administrative criteria as a standard requirement, looking into compliance and Broad-based Black Economic Empowerment (BBBEE), small business development (SBD), etc. The second criterion was the legislative compliance relating to medicine, and this was limited to suppliers who were applicants on the Medicine Registration Certificate, and products that were registered. Thirdly, the technical evaluation included sample evaluation, which focused on the capacity of the companies to supply, the security of supply of APIs at reasonable prices, and the application of the 90/10 preference point system in favour of local manufacturers.

He divulged into the details of the preference for local manufacturers, highlighting that through engagement with the Dti it had been agreed that the HP13-2015 ARV contract would be designated for preference for local manufacturers, provided that this did not negatively impact upon security of supply and affordability. The following conditions applied:

  • The Medicine Control Council (MCC) certificate of registration for a product listed the primary site of production as one that was located in the RSA;
  • The reference price as published by the Department of Health had not yet been exceeded;
  • Demonstrated capacity to service the required volumes as evaluated in terms of the data provided in the bid response document;
  • Bids were within 10% of the bid with the highest points scored; and
  • Compliance to all other aspects contained in these special conditions of contract.

In terms of the overview of the tender award, a total of 32 line items had been awarded on the tender. Of these 32 items, one product – the fixed dose combination ARV TEE -- constituted 72% of the value of the tender, at about R10.2 billion. This contract was split amongst four suppliers, of which three were formulating the product locally, and had 72% of the contract. Notably, the majority (67%) of the awards went to locally produced ARVs. Awards for imported products were made mainly for ARVs where there was a sole bidder – these were products were there was a single supplier globally.

Discussion

Mr P Atkinson (DA) said that Dr Pillay had made mention of the 2013 and 2015 tenders, so it seemed that they happened in a cycle of three years. Was there any information that could be presented to the committees about future tenders?

Mr S Mbatha (EFF) began by criticising the Dti’s industrial policy, and said that the strength of the disease in SA was widely known and just by analysing the statistics, it seemed that it was still going to be prevalent for a long time. The World Health Organisation (WHO) had projected that SA would probably reduce the scale of the country’s purchases around about 2040. Furthermore, the Dti could not compete against the majority of the current service providers on its list. He asked how the Dti was intending to shift the future budgeted purchases in favour of the countries that would allow South Africa to formulate lucrative (50/50) partnerships with them. It was highly unsustainable if the current prices persisted.

Mr S Tleane (ANC) asked Dr Pillay about the scorecard, and why there was no “G” ( for good performance) in the scorecard regarding the performance of the companies in the provision of their services to the Department of Health.

He asked Ms Soomaroo about adequate incentives in the pharmaceutical value chain, and what incentives were made available in the industry, as it seemed that there was a lack of them. What did the uncertainty in the policy environment, as mentioned in the presentation, imply in relation to the API and intellectual property?

Ms T Gqada (DA) referred to the Dti presentation, in which it was stated that 276 companies were licensed with the Department of Health and the Medicine Control Council. She then asked how many of those companies were private, and how many state-owned. The presentation had outlined very clearly the SWOT analysis, including the challenges, but what it lacked was the action plan on how those challenges would be addressed. The presentation had also outlined the issue of the skill shortages – that 12 000 pharmacists must be produced in South Africa to meet the international benchmark -- and clearly this was not something that the Department of Health could meet on its own. It had to partner with other departments. She asked how would this be achieved if the Department was working in a ‘silo.’

Ms C Matsimbi (ANC) asked about the plans that had been put in place to address the challenges that were faced by the Dti, concurring with Ms Gqada about the outline of challenges in the presentation, but the lack of an action plan.

Co-chairperson Dunjwa raised her concern about the skills shortage in the sector, and asked how best the departments thought the country could move forward to mitigate the shortage. It seemed that there were no oversight visits by the DoH to ascertain whether the companies that it tendered with had the capacity to supply the required quantity of drugs, because even in the scorecard there was no single company that had a “G,” and the DoH sat with the challenge of drug stock outs. Therefore, was there a strategy or capacity in the Department to follow up on these companies?

She asked if the Dti could provide the pharmaceutical industry charter that had been developed in 2005, but had not materialised.

The Chairperson said that the factors affecting local production were still in place, and it seemed that they would continue being in place because they were not medium-term challenges, such as the skills factor, the volatility of the Rand, etc. The Dti wanted to develop the industry, so it needed to take these factors into account. How far had the Dti gone, and what did it think were best solutions in order to address those challenges. Collaboration with other stakeholders would make a significant impact, so how was the Dti planning to partner with other departments to tackle the challenges jointly. The Dti had allocated a lot of money towards black industrialists, but was this industry benefiting from that funding?

Dr Pillay said the Department of Health had been anticipating how the next tender was going to be structured, and some of the ARV drug developments would probably influence the way the tender was structured. There was a new ARV drug called “Dolutegravir” that would replace the three drugs that were currently used. The advantage of this drug was that it was used in a small dose. This would cost less and it would be in a smaller tablet size. Currently, the companies were formulating it in order to get it registered with the Medicine Control Council. The Department was anticipating extending the current tender so that those products could be ready -- it was avoiding awarding a tender and being in a position that it would not be able to purchase the drug when it got to the market. Two companies had already submitted the drug to the Medicine Control Council, so it was advisable that the Department did not award a tender just yet until the approvals for “Dolutegravir” were completed.

With regard to the scorecard, there was a team of about six people which was monitoring the supply of all drugs, and from time to time manufacturers had a problem with the supply, and one had to be quick to react to get another supplier to produce. There were a very few companies that were able to get ‘Gs’ for supplying in the quantity that was required by the state. The Department tried to manage this internally to ensure that stock outs were avoided, and monitored it daily.

With regard to intellectual property (IP) policy, a lot of the ARVs were patently protected. If it were not for the patents, SA would not have the access to roll out these ARVs to the extent that it had. However, there had been global agreement that ARVs were of public health interest and one could not assign patents to such products. Many of the patent holders had voluntary licences for local manufacturers to be able to produce ARVs, and the Department, together with the Medicines Patent Pool (MPP), had facilitated the transfer of these licences. It was probably in other areas where there were significant challenges, such as cancer, where some companies were not willing to share their IP with other local manufacturers so that these products could be produced locally.

There were no state-owned companies currently registered with the MCC to produce any products at this stage. With regard to the skills shortage, if one looked at the area around formulation, this was a critical area and none of the local universities currently had the capacity to produce these skills. The big local manufacturers were bringing in Indian nationals to train South Africans -- for between 18 months and two years -- because locally they can not get the skills, and the cost of labour in South Africa was much higher compared to India. On the API side, the need for chemical engineers was critical. If one looked at a country like India, it produced a lot of chemical engineers who would be involved in pharmaceutical production. At the broad level, there must be an agreement that the pharmaceutical sector needed to be elevated, and there was a need for coordination with other relevant departments.

Ms D Rantho (ANC) asked why South Africa did not take students to India to be trained and educated in order get the relevant training and circumvent the skills shortage when they came back to the South Africa.

The Chairperson said there were learners who were interested in becoming chemical engineers, but when they applied to universities there were certain blockages that disallowed them access. Perhaps this was something that could be discussed jointly with the Portfolio Committee of Higher Education and the engineering associations.

Ms C Steyn, Chief Director: Department of Health, referred to the complexity of the pharmaceutical sector, the issues around policy development and the skills shortages had been a prevalent discussion as of late. From an incentive perspective, there was no customised incentive for the pharmaceutical sector, and perhaps the closest thing to an incentive was the preferential treatment for black industrialists if and when they met the criteria.

Dr Pillay referred to the role of government, and said that when a country decided that it would prioritise pharmaceutical production, it was done a coordinated and integrated fashion. In India for instance, the office of the president and the vice president were actively involved in the industrial strategy, and the pharmaceutical sector was part of it, so they bring together all the government stakeholders that were relevant and coordinated the programmes. There was a very broad integration of the strategy. The Departments of Trade, Science and Technology and Health in India were also part of the team that were looking at the same objective, and even the medicine regulator was also part of the team.

Opportunities existed for training and collaboration, and he recalled that there was a memorandum of understanding that had been signed by South Africa and India to send students, but nothing had yet been done to take advantage of it. Currently, it was only an agreement on paper.

Whether the skills issue was a pre- or post-1994 issue, it was historically South African drug companies which were established by the apartheid government to basically support pharmaceutical production because there was always the concern that they would not get access to medicines, so they wanted local capacity. That thinking needed to be broadened within the current South African context.

With chemical engineers and the like, there was a never a thinking that the country would become an API producer one day, and that was why the planning around API plants never occurred. However, if the country were to set up plants now or in future, it would have to import the skills from India or China, because currently South Africa lacked the skills to build those plants itself.

The Chairperson said that if India could build a plant in Russia, why could they -- or China – not do so here? This was something that needed to be looked into. It did not seem the Dti was focused on the plan, and that dedicated efforts had not been set in motion to make to transform the industry.

A Member of the Health Committee said that the country was not taking advantage of the Skills Accord that had been signed between SA and other countries. He asked whether it would be possible to get a report on what was happening with the Skills Accord to ascertain where the country was in terms of materialising and taking advantage of those partnerships to develop the skills in South Africa.

Ms Soomarro replied that the content of the presentation had been guided by the letter that was received by the Department from the Committee, so it had not taken the opportunity to highlight the Dti’s industry development framework that it was working on. The Dti had focused previously on just designation and preferential procurement as a lever that would support industrial development. The reality was that given the increase in the trade deficit and the issues around currency exchanges, the Dti had to look at a variety of enablers to help the industry sustain itself and grow. It was also looking at overcoming the erosion in the export base through a contribution by pharmaceutical exports out of the country, so it was on that basis that the Dti was now working on a plan. At the next meeting, it could be presented to the Committee.

The industry did not have an industry-based incentive. The main biggest problem, besides some of the enabling issues, was that the industry requires upfront capital investments, and the technology costs required were huge, and given the economic climate at the moment it had impacted the Dti. There were no adequate incentives to encourage companies in the industry to invest, so the Dti had to look at other enablers and partnerships to develop the industry.

With regards to the skills, the Dti had taken the matter to the Human Resources Developmental Council that was chaired by the deputy president and there was consensus now that the secretariat was going to assist the Dti to put together programmes around developing the skills in the industry.

With regard to the industry charter, that would be provided and sent to the committees at a later stage. As for the black industrialists scheme (BIS), the companies that qualified as projected by the BIS criteria and guidelines got preferential treatment, and it had supported a few companies in this space. Those companies had to be 51% black-owned. The bilateral agreements had been noted.

The meeting was adjourned. 

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