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Empowered drugs

 Abiding by the rules of the black economic empowerment police can be a painful process. But it’s a necessary part of business, and effective empowerment is no doubt good, because it spreads the economic benefits of listed companies to new shareholders. But often the latest empowerment declaration – usually by National Treasury or the Department of Trade & Industry – is greeted with a sigh and quietly complied with.

So it’s a welcome surprise to see new empowerment rules being welcomed by South Africa’s pharmaceutical companies. They not only seem to open up the sometimes hazy allotments granted for the important State tender market but also improve the investment outlook of listed pharmaceutical companies.

State tenders are a big market. The leading player is Aspen Pharmacare, the generic medicines specialist. But Adcock Ingram has also been winning some large tenders – mainly for anti-retrovirals (ARVs) used to help treat and often prolong the life of people with HIV/Aids. Personally, it seems a bit worrying empowerment status should come into a sector supplying much-needed drugs like ARVs. But the pharmaceutical companies welcome it.

“For Adcock Ingram, the recently published amendments are a very significant development for us and a good outcome for us going forward,” says Dudu Ndlovu, the company’s head of group corporate affairs. CE Jonathan Louw had a problem after the latest ARV tenders were released, because he felt the group’s empowerment status hadn’t been properly considered. Adcock sold 13% of the group to black investors last year in a deal valued at R1,3bn. Its empowerment partners are locked into share ownership for the next 10 years.

In a typically complicated way, healthcare procurement will fall under the recently published Preferential Procurement Policy Framework Act. What that means is the empowerment status of pharmaceutical companies can help win State tenders. Under the old system black equity ownership often counted for nothing because National Treasury viewed shareholdings as something that could change at any time. The new regulations will recognise equity ownership and also other elements of company empowerment. It seems a fairer system and the pharmaceutical companies welcome it as a major policy shift in the right direction.

From an investment perspective it will make it easier to evaluate how the companies are doing in the State tender market. Winning such tenders adds a lot to the investment potential of a pharmaceutical company. Though they all trade on fairly high earnings multiples in the upper teens, they’ve proved good defensive investments. Now it looks as if there’s added growth potential.

That’s the positive development. The frustration for pharmaceutical companies is trying to get new medicines, often ARVs, through the Medicines Control Council (MCC). Once a company has developed a new drug – and there’s always a long list in the pipeline – it has to be registered with the MCC. In some cases that can take years. The tragedy is those are sometimes new drugs, such as ARVs, people are literally dying to get. As an example, Louw says Adcock still has around 250 products waiting for registration after more than three years. The MCC claims “capacity constraints”. That seems to mean it doesn’t have enough people to deal with the registration of new medicines. And it’s not only the pharmaceutical companies that suffer: the public also has to wait longer for lower priced new generic drugs.

Healthcare in SA, and probably in most parts of the world, is often reeling under regulations. It’s understandable the industry should be regulated. But not too much to affect the investment merits of pharmaceutical companies.

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