However, the current increases do not go far enough in ensuring that the industry in South Africa remains sustainable. The current increase of 5.8% is pegged at inflation, when an increase of no less than 8.5% is required due to the rapid weakening of the Rand.
The industry has in the past called for a set formula, similar to the way petrol prices are determined by adjusting according to exchange rate fluctuations. As most active ingredients must be imported, the exchange rate plays a major role in production cost.
If pricing is not set correctly, profit margins are narrowed, which will soon see generic companies discontinuing unprofitable products. The products mostly affected are older, cheaper generics but the withdrawal of these products will further limit consumers' choice of low priced generic alternatives.
This year's increase echoes that of last year's 5.8%. The industry's 0% increase in 2011 and only 2.14% in 2012, means that margins are being consistently squeezed year after year - an unsustainable annual compounding.
The Pricing Committee's recent consideration to establish different price inflators for fully imported generics, locally produced generics and originator medicines is not feasible, since medical aids typically set their reference pricing on the most affordable product available on the market.
A price differential will result in medical aid members having to make co-payments for medicines and it is unlikely that medical schemes will want to pay different prices to importers and local manufactures for the same active ingredient.
The current formula is weighted at 70% CPI and 15% each for the Rand/Dollar and Rand/Euro exchange rates. If a set formula is introduced, the arbitrariness of price increases will be removed and the industry will be given a better shot at remaining sustainable.
Consistency and predictability in price determination will not only ensure healthier and ongoing competition but also will ultimately support continued growth in the sector and the economy as a whole, while keeping generic medicine accessible to the public.
