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EF: Do you think executives of other industrial sectors realize the complexity of healthcare?
SN: I don’t think they understand the complexity of our business. Getting the balance on social, profit and purpose is difficult. For the development of NHI the government has put together a ‘5 a side team’ which includes 5 representatives from the Department of Health and 5 from business. I am leading that second group with Jonathan Broomberg, Discovery CEO, Melanie Da Costa from Med Care, Steven Smith representing investment and Dr. Ayanda Ntsaluba, former Director General of Health. There is a presidential health conflict; in South Africa any legislation has to go through a legislative entity called NEDLAC which is made by government, labor, business and civil society so the real negotiation on NHI will end in the NEDLAC chamber where there is a 6 a side being put together, 6 from labor, 6 from business, 6 from civil society and 6 from government. I am also leading there on behalf of business. Every healthcare structure is represented, in the case of hospitals it is HASA, pharma has PTG, the funders have BHF and it all gets channeled back to the legislative process. Today in the South Africa healthcare scene we have 2 fronts, the NHI is dealing with the future of health, while the Presidential Health Compact is dealing with the current issues. The health compact is a great undertaking based on nine different pillars which deal with what needs to be addressed. Pillar number two speaks to procurement and supply chain. The president’s office set up a steering committee to have oversight on the implementation of the 9 pillars chaired by Dr. Olive Shisana. The country and the president now face 5 key challenges, his economic priorities are:
- A very low growth trajectory
- High public debt which can lead to a debt trap
- Restoring investors’ confidence, inherited from the previous administration,
- Significant unemployment (29%), youth unemployment is currently sitting at 56%,
- An increasing loss in global competitiveness.
These are the areas the president is focused on turning around. He must also restore governance liquidity and sustainability on the state-run enterprises. The president has some difficult decisions to make. Business groups are firmly behind President Ramaphosa even when we can get a bit impatient with him. We met two weeks ago and we're sharing our concerns about structural reforms not being implemented as quickly as expected. A very big part will be the investment drive, the president is said to talk of raising a hundred billion dollars of new investments mainly from foreign investors and some domestic investments over the 5 years, so he is 12 months into that. He had a good first year, he raised 283 billion rand. All the business influence is under BUSA, and there are other government appointed councils helping to drive business the most important is the BRICS Business Council. These councils try to attract business, the pharma market is valued at 54 billion rand and approximately 9 and half billion of that is in the public sector which represents about 84% of the population, although the reality is that many public sector patients default into the private sector because they don’t want to queue for hours. We have what we call dispensing doctors in the townships that offer service for 150 rand and for this they will see a patient who does not have a lot of money, give a diagnosis and dispense a drug which won’t be cutting edge drugs. The private market is valued at 44 and a half billion rand and largely covers the privately health insured segment of the population (20% of the volume) around 9 million patients funded through private insurance mainly with some pocket schemes. There are 5 different trade associations in pharma, the biggest is IPASA which has about 35% market share, the second biggest is PHARMISA with 30% share, the third biggest is GBMSA which has about 20% of market share, the fourth is an association that used to be called SMASA but has very recently changed its name and finally the fifth one is the Black Pharmaceutical Industrial Association which has only 7% of market share. PTG is the umbrella body that represents all the associations on key issues of the industry.
Regulatory structures and strategies are important for the pharma industry such as SAHPRA. They just appointed a new CEO starting on January 1st, she is a PHD biochemist with a public finance management degree. SAHPRA ‘s mandate is quality, safety and efficacy. There is quite a significant backlog of dossiers; the biggest backlog is on post registration amendments, because if amendments need to be done the whole process has to restart. The Pharmaceutical Economical Venue Action Unit (PEU) within the Health Department deals with pharma economics and is responsible for managing the private sector pricing, then there is a second strata in the Health Department which covers the public sector procurement called Affordable Medicines Cluster, where the procurement is done on a competitive process with a points system. A third strata outside the National Health, the Council for Medical Schemes, regulates the private insurance and their primary aim is to protect patients that are not covered under the Health Insurance, the ones overlooked by private insurance and they are about 80% of the market in value not volume. Another important department is Trade and Industry as they are responsible for intellectual property, so in a pharma context the 3 most important areas are Industrial Policies, Trade Policies and IP Policies. The Ministry of the Treasury is also important as the are the ones managing tenders. Finally, the department of Science and Technology, that have an initiative called the PPGI (Public Private Growth Initiative which was driven by the Presidency and a former politician called Roelf Meyer. Roelf Meyer and Ramaphosa were the architects and drafters of the South African Constitution, which is widely hailed as one of the most progressive and robust constitution and many countries look to it. The PPGI initiative has been moved into the Department of Private Industry. The department of Science and Technology has done a lot of R&D, but we must be realistic on how to drive this, there is a discussion and a debate around its generalization, but it’s not about cutting edge technology. The shortage of healthcare professionals is partly due to inefficiencies in the system. In the public sector a doctor spends 10 or 15 minutes trying to find the patients records and if the records are not found it has to be done over and this takes a lot of time, so there is a lot to be said about digitalization particularly of the private sector to improve inefficiencies to improve the productivity of the sector.
Our country is going through difficult times and one of the easiest ways to start restoring investors’ confidence is to promote and enhance the international brand reputation of South Africa to attract new investments. For this reason the report is quite important and will help rebuild confidence and get back the investors sentiment which has been destroyed. One thing is confidence, and another is sentiment and if you are in an emerging market when there is a breakdown in confidence the sentiment goes as well whereas in the UK for example there is a rising confidence but not necessarily in sentiment.
The pharmaceutical supply chain is split up in 6 areas, first the manufacturer and the importer; next we have the distributors, the wholesalers, the retail pharmacies -called community pharmacies- and the dispensing doctors. The pharmacies can be corporate or independent. The independent pharmacies represent about 55 to 60% of the market and the corporate 40 to 45%, the biggest being Dis Chem Chemists followed by Pharmacy Benefit Management Pharma Companies. The pharmacies all belong to different associations, but the South African Pharmacy Council regulates all pharmacies and wholesalers, some of them have negotiation mandates and some don’t, they also regulate manufactures from a pharmacy compliance point of view (not the manufactures licenses, permits to import, etc.). The last part of the chain includes IT companies which are new innovations for industrial revolution. There are new innovations taking place, for example a big problem with the public sector hospitals is the huge queues, patients can queue for 8 hours to get their clinical medicine, one can wait all day and still not get it and have to return the next day. Patients sometimes can’t due to work etc., so new technology has been introduced in form of an ATM that dispenses medicines and this is one of the RT care solutions that have been introduced and there are many others. The ATMs are also regulated by the Pharmacy Council; they replace a pharmacist with a robot, and they cover some of the funding aspects. Another innovation for example is using tele-medicine, Dis-Chem are currently piloting a new idea, when going to the pharmacy if a patient has throat problems they have a screen in a consulting room where the patient is examined by way of putting a camera down his/her throat which is projected to a panel of doctors who diagnose the problem and prescribe a drug if necessary, which is electronically generated from the panel to the health insurance company and can be all done for the cost of 200 rand.
EF: Concerning PHARMISA, what is at the top of your agenda?
SN: We want to produce 100% of the products of South Africa!!
But a few facts, pharmaceuticals and medical devices are the 5th biggest contributors to the South Africa’s current accounting facilities, there is a CEO initiative of 150 CEO’s of the biggest South African companies, like Adrian Gauze from Discovery, CEO’s of the big mining companies among others, to try and restore investor confidence. The rating agencies are looking at the matrix of the country including the current accounts data, and the trade deficit in pharmaceuticals which is about 25 billion rand. I mentioned earlier on the size of the industry was 54 billion rand, and by the way that 54 billion is the manufactures exit plus, not the chemists exit plus so the manufactures exit plus excludes the logistics fee and the dispensing fee which is added on by the pharmacists. The trade deficit has been growing year on year, mainly due to imports from Asia. The challenge is to sit firmly with the President’s agenda of reindustrializing the country. An alarming statistic is that manufacturing 22 years ago represented and contributed 22% to the GDP, today it represents 11.5%. Reindustrializing the country is a very important initiative for the president, his biggest priority probably at the moment. Being the 5th biggest contributor the challenge is how we base local procurement and localization in the sector and how to promote transformation and back industrialists, this last point being fundamental. Deals where people acquire shares in a list of companies is not industrialization. An industrialist gives something back; they give jobs and multiply the feedback into the economy. Retail is not always a multiplier as there is no production and no backward or forward linkages.
Presidential agenda; how we get there:
Priority # 1: Government must start to implement its policies: the volumes are sitting in the public sector, and the government through the Health Department must implement its policy of localization and local procurement, something they are not doing that at the moment. Government procurement happens through the PPPFA (Preferential Procurement Policy Framework Act). The regulations for local procurement are called Designation which means the government though these regulations designate a portion of a tender: for example, they designate for antivirals because we have the capacity in the country of 80% of the volume for local production. But the problem is that Health does the procurement and they are not industrialists, the truth is for everyone rand consumed in the public spend in pharmaceutical 0.30 cents of rand will be generated back into the economy more than with an imported product. It is a no brainer although policy cohesion is lacking, because Health are not commercially orientated, it is not their mandate but I am hoping this will change with the current administration. There are 28 ministries and Ramaphosa is trying to give them cohesion.
Priority # 2: We need to retain existing investors in pharmaceuticals and attract new investors. In South Africa 35 facilities, mainly multinational facilities have either shut down, disinvested or downsized in the last two decades. We must do something to retain these investments; Aspen has in the last 3 years invested more than the whole industry has invested in the last 20 years. It is my opinion that SAHPRA must give preference to companies prepared to produce locally, if the investor can prove that they will produce locally they should expedite the factory, registrations on dossiers and the reviews of post registrations amends and if the importers complain, suggest they set up in South Africa and enjoy the same benefits. We are also working on another point; if a person can prove he will be producing a generic locally he should get six-month exclusivity on the recent model. We need to these things for the economy to grow and have money to service the patients. Right now, the importers are enjoying more benefits than local producers and it should be the other way around otherwise we will lose the few local producers we actually already have. It is important to have local producers because we have one of the worst disease grade countries in the world, we have the developed countries diseases, non-communicable diseases like diabetes, CNS conditions, mental health, cardiovascular,etc. And we have the worst of the infectious diseases, and one fuels the other because a lot of the patients on antiretrovirals have developed heart problems and are at risk of a stroke etc. One feeds into the other so this could be an opportunity for the country.
Priority # 3: Security of supply: South Africa has been riddled with ‘out of stocks’ and one cannot be out of stock on drugs like antiretrovirals or TB dose because patients become resistant and have to move to second or third line and eventually run out of options. Once a patient gets to third line drugs, they become more expensive, so more cost, more complications and more doctors and nurses and pharmacies are necessary. We won’t get security of supply unless the procurement policy is changed and can’t have two-year tenders. The procurement model is not good as you can’t award a tender for two years and then change for another and then decide to go back to the original, serious companies are not interested in this kind of short-term tenders. It is comparable to a roller coaster and people don’t invest in a roller coaster. People want a smooth ride, so the procurement model must change to get better security of supply.
Priority # 4: Incentives to promote capital investment, the most common of these allowances is called Section 12 Act Allowance and it is a section out the Income Tax Act and means for every hundred million invested in a pharmacy there will be a 28 million tax deduction once producing products, once a hundred million roof of sales is generated 28 million will come back as an incentive. But it is not always competitive, so the incentives need to be customized and tailored so that they are more specific for both government and industry.
Priority # 5: Export incentives: The Finance Minister is working on growing the economy, South Africa should be growing above 0.7%, the existing disparity in the country is scandalous, there are a lot of areas where we can grow, in mining, iron-ore, and coal. We should be operating in a trade surplus, not a trade deficit. We must focus on the manufacturing sector.
EF: What would you do differently if you were the finance minister?
The priority should be to get our growth from .7% to 3.5%, (which is where we should be at), I would focus on the 3 quick wins. Firstly, tourism. If safety and security are a problem, and we’re sitting with 29% unemployment, I would train up informal police, pay them a minimum wage, and have them at airports when tourists land. Of course, the visa problems will have to be resolved too. Secondly, I would turn around the pharma manufacturing sector, which has most potential. South Africa accounts for only .3% of the pharma world market and is only the 29th biggest economy. Exports are critical. I would go to companies that have the potential to manufacture and provide them with an export incentive. The more you deliver, the greater your incentive, in tiered structures. It’s no different from incentivizing a manager in sales. My third opportunity is in agribusiness. We’ve got great land and great export potential that we’re not optimizing. Those are the three areas I would focus on.
