Currency weakness a bitter pill

RED flags were flying this week over prospects for local manufacturing when the head of one of South Africa's most global companies warned that regulation in local pharmaceutical pricing could impact future availability of some products.

RED flags were flying this week over prospects for local manufacturing when the head of one of South Africa's most global companies warned that regulation in local pharmaceutical pricing could impact future availability of some products.

Aspen Pharmacare CEO Stephen Saad warned that heavier regulatory burdens and significant exchange-rate movements together with input costs such as electricity were not covered by the price-cap increases, making it potentially unviable for some products to remain on the shelves.

Aspen, which sells products in more than 150 countries, posted strong annual results this week. Its share price hit a record high, giving it a market value of R155-billion.

The group reported a 29% rise in profit for the year to June as the effects of a weak local market were offset by contributions from offshore bolstered by overseas acquisitions. Group revenue soared 53% to R29.5-billion, but South African business revenue edged up only 1% to R7.4-billion.

International business revenue jumped 24% to R12.7-billion, though some margins decreased.

Saad said some products had become less sustainable as costs had risen.

"You need volume growth, preferably export-volumes growth in hard currency or else local manufacturers have a limited future."

The challenge for local manufacturing lies in weak local currency and price increase caps. Manufacturing output plummeted in July, falling 7.9% year on year, the biggest contraction since October 2009 after increasing 0.2% in June.

The rand dropped about 25% against the dollar last year and about 70% over the past two years.

Imported components make up much of the cost of goods. Single-exit price legislation means that once a year the health minister regulates prices, which were aligned more with CPI than exchange-rate movements.

The single-exit price rise of 5.82% this March was not enough to counteract the rand's weakness and wage and energy cost inflation. The formula is supposed to cover exchange-rate and CPI increases.