[Ip-health] News: The African Executive- State Pharmaceutical not Good for SA

Terri - Louise Beswick Terri at haiweb.org
Thu Aug 12 08:38:12 PDT 2010

State Pharmaceutical not Good for SA


A proposal to establish a state-run company to locally manufacture
pharmaceuticals may, at first, sound appealing. After all, local
production of pharmaceuticals would provide local jobs, increase
expertise, cut dependence on foreign suppliers and reduce transport


After consideration, one has to admit that the South African market is
just too small to achieve economies of scale in production. This means
prices probably would have to be high and a local state-run manufacturer
of drugs would not be able to compete against the already established
private manufacturers. And more probably, it would never be able to
compete with large multinational companies so exports would be out of
the question.


South Africa already has a number of highly efficient generic
manufacturers of drugs that meet the international quality standards. It
is imperative that these quality standards are met because without them
there could be treatment failure or drug resistance and an entire class
of drugs could be rendered useless.


To have a state-run company locally manufacture pharmaceuticals, as
suggested recently by Zwelinzima Vavi, General Secretary of the Congress
of South African Trade Unions, is worrisome. The economic consequences
of local production are entirely predictable. A state run company will
be a drain on the economy. It will not have the same economic incentive
to improve as a privately owned company because there will always be the
taxpayers to bail it out. It will predictably ask for protection from
more efficient foreign producers, increased trade barriers and continual
cash injections (probably under the guise of restructuring costs). This
will create uncertainty among investors and deter investment in South
Africa by international companies who are not only creating jobs but
also transferring knowledge and skills.


Instead of trying to produce the drugs itself, the government should
rather create a better economic environment to attract more
international companies, both generic and originator to this country.
What is needed is for the government to ensure a sound property rights
environment by enforcing trademarks, protecting intellectual property
rights, and ensuring that contracts are enforced, so that South African
taxpayers do not foot the bill through subsidies.


The registration process conducted by the Medicines Control Council
(MCC) should also be streamlined. The MCC is responsible for registering
all new medicines and ensuring the efficacy of the drugs on the market.
According to recent media reports, the MCC is currently dealing with a
backlog of nearly 3,000 medicines that could take it another two years
to resolve. Some may consider it necessary to have a regulator to ensure
that products are safe, but it is no use if the delays caused by the
size of the task prevent life-saving drugs from entering the market.
This bureaucratic delay is a major deterrent for manufacturers wishing
to invest in South Africa because it reduces the effective life of their


The South African government has already taken a step in the right
direction by eliminating all tariffs on pharmaceuticals, thus increasing
access to medicines. It should now consider the removal of VAT on all
pharmaceuticals if it wants to help the sickest and most vulnerable
members of our society more effectively.


The government's introduction of price controls was a knee-jerk
reaction. In the long run, price controls actually reduce access to good
quality medicines because they reduce competition, the best means of
keeping prices down, and deter companies from registering any new
medicines. When prices are set below the market clearing rate, shortages
occur. Price controls deter purveyors of good quality medicine, who
typically have higher manufacturing costs in order to maintain
internationally acceptable quality standards, from entering the market.
The controls not only create shortages in the market, but also open the
door for counterfeiters and the producers of sub-standard medicines who
do not abide by the same manufacturing standards.


The idea of a state-run pharmaceutical manufacturer may be appealing at
first but any rational individual, after digging a little deeper, will
conclude that the origins of this idea have more to do with politics
than economics or the desire and determination to see the best possible
medications made accessible to all South Africans.


By Jasson Urbach,  Director of the Health Policy Unit (a division of the
Free Market Foundation)



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