Drug company mergers could cause price hikes

2013-12-04 17:57

The merging of pharmaceutical companies – such as the proposed buyout of Adcock Ingram – could lead to higher medicine prices, research has found.

A report released by consulting firm PwC in June shows that health industry consolidation globally has increased more than 50% since 2009, an activity that is expected to continue through to next year.

The report also cautioned that historically, consolidation has led to higher prices in some markets.

Globally, consolidation in the pharmaceutical industry has been a growing trend, and it appears South Africa is catching up.

Recently, a Chilean pharmaceutical company made a bid for South Africa’s Adcock Ingram, which boasts popular products such as Panado, Compral and Corenza as part of its portfolio.

This comes after South Africa’s third biggest pharmaceutical company, Cipla Medpro, delisted from the JSE earlier this year after it was bought out in a $4.46 billion (R46 billion) deal by Indian drug company Cipla India.

In Cipla’s case, a big reason behind the deal was using Cipla Medpro as a springboard for Cipla India into other African markets.

According to technology company IMS Health, by 2016, pharmaceutical spending in Africa is expected to reach $30 billion.

A 10.6% compound annual growth rate through 2016 is expected in Africa, second only to Asia Pacific with a compound annual growth rate of 12.5% and in line with Latin America at 10.5% during the same period.

“Spurred by a convergence of demographic changes, increased wealth and healthcare investment, and rising demand for drugs to treat chronic diseases, this market potentially represents a $45 billion opportunity by 2020,” IMS Health said.

Chairperson of Adcock Ingram, Khotso Mokhele, also highlighted the ability of Adcock Ingram to have access to high growth markets in Africa and other emerging markets through its deal with CFR.

“Adcock’s growth is constrained as a single-country operator,” Mokehele said.

“A combination with CFR provides Adcock with the scale and reach to accelerate its growth strategy. It creates access to new growth markets and generates operational efficiencies through transfer of manufacturing and additional investment.”

One of Adcock’s shareholders, the Public Investment Corporation (PIC), which has an 18.6% stake in the drug company, has been hesitant to support the deal.

Although the PIC has played its cards close to its chest, various reports have speculated that the PIC, which invests on behalf of the government employees’ pension fund, is nervous about handing over control of Adcock to foreigners.

But this could just be a symptom of the continuing consolidation expected in the pharmaceutical industry for the next few years.

In a joint survey by global graduate business school INSEAD and consulting firm Management Engineers among 47 executives from 42 pharmaceutical companies in Europe, the majority expected the pharmaceutical industry in Europe to be further concentrated in a reduced number of giant companies by 2020.

And as Africa’s share of the global pharmaceutical profit increases, it may not be able to escape the trend.

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