Cluster performance – Pharmaceutical

Overview

AfroCentric has a presence across the entire pharmaceutical value chain, which provides risk mitigation due to revenue diversification and enables the Group to deliver on its ambition to reduce the cost of healthcare.

Our performance

The pharma cluster delivered an operating profit of R336 million, up 9.7% from the prior year. This resilient performance was achieved against the backdrop of the uncertainty of the global COVID-19 pandemic, which continues to redefine the operating context of our business. The challenges faced by our industry were further exacerbated by the subdued economic recovery in South Africa, resulting in constant changes to consumer spending patterns. These factors contributed to the lower than expected profit growth in the pharma cluster, with sales of preventative medicine retracting to pre-COVID-19 levels. Other factors included reduced script performance due to nonadherence to the renewal of chronic medicine scripts, the slower than anticipated progress on the oncology product line, and price pressure to reduce the single-exit price. Encouragingly, the reduction in the private portfolio script performance was offset by an increase of 8.1% in the DoH script performance.

Despite the challenging operating environment, management’s agile response enabled the cluster to adjust to changes in market demand by implementing operational efficiencies, driving down costs, growing the customer base and continuing to diversify revenue streams. As a result, the pharma cluster contributed 32% of AfroCentric’s operating profit, up from 30% in 2021.

Importing and marketing pharmaceutical products

Activo Health specialises in importing and marketing pharmaceutical products and trades in all pharmaceutical industry sectors.

Activo Health’s diversified basket of products has, in part, enabled the business to deliver an 8.3% growth in operating profit compared to 2021. However, the non-adherence to script renewal suppressed the ARV sales volumes during the year. This decline is attributable to the expiry of the Prescription Extension Ruling. Previously, this ruling allowed doctors to renew a patient’s script without a physical consultation. However, the reduced physical patient consultation has not recovered since the expiry of the ruling, with doctors hesitant to renew a script without a physical consultation. Sales volumes were also adversely impacted by the change in consumer spending patterns, with the demand for vitamins and other preventative medicine normalising to pre- COVID-19 levels. Management is closely monitoring these trends and has since implemented measures to improve adherence to the renewal of scripts and efforts aimed at increasing demand for preventative medicine.

The progress of the oncology product line has been slower than expected due to a setback with one of the key products related to a name change. However, we anticipate that the sales volumes will increase as the renamed product gains market traction.

Pursuant to AfroCentric’s strategic growth objectives in the health sector, Activo Health concluded its acquisition of Forrester Pharma, effective 1 August 2021. The acquisition is consistent with AfroCentric’s growth objectives in the health sector and will strengthen Activo’s product offering to the pharmaceutical market.

Buying and distributing pharmaceutical products

AfroCentric buys and distributes pharmaceutical products through its subsidiaries Curasana, Pharmacy Direct and MMed Distribution.

Curasana is a speciality pharmaceutical wholesaler and distributor to all major wholesalers in Gauteng and has developed its distribution capability to extend its service offerings within the value chain. Curasana’s performance during the year was resilient, with a continued drive to achieve sustainable growth and value creation by leveraging and optimising its working capital by creating efficiencies that will reduce costs for the overall pharma cluster value chain.

Pharmacy Direct distributes and delivers chronic medicine to urban and rural areas for medical scheme clients and government’s CCMDD programme. Within the current context, we were able to assist government in fighting COVID-19 by alleviating congestion in high-risk public healthcare facilities and reducing the cost of delivering chronic medicine.

In a challenging operating environment still characterised by the ongoing effects of COVID-19, Pharmacy Direct delivered negative growth in operating profits.

The Robotic Automation of the dispensary reached its final implementation stage with the formal opening by our chair, Dr Anna Mokgokong, on 4 November 2021. The solution is performing well and will allow Pharmacy Direct to scale the business at short notice. In addition, initiatives such as redesigning and digitalising the back-office support and clinical processes are underway. These strategic initiatives are yielding positive results with a significant reduction in the cost per script, as well as enhanced patient care and service experience. The implementation of these initiatives resulted in Pharmacy Direct incurring once off costs, which will be fully realised through improved operational efficiencies in the short to medium term.

With the successful launch of the Pharmacy Direct Online Store, the store has been added as an MVP (Most Valuable Product) for the AMP app. In addition, there is a greater focus on diversifying income through ongoing strategies to sell-up and dispense in other therapeutic classes on the online store. This strategy will also reduce the risk of over-reliance on a specific scheme and certain therapeutic classes (such as ARVs), minimise the adverse impact on Pharmacy Direct against current operational and economic changes, and position the business for future growth.

The MMED business unit, which specialises in hospital cost efficiencies through device procurement and sourcing interventions, managed to deliver 11.85% in annual savings to all participating schemes against all external medical devices and achieve a further 11.38% (> R9 million) in overall savings for all schemes against internal cardiac prosthesis for the same period. Due to the success of the MMED interventions, the Group will extend the prosthesis categories to include other high-cost devices from the spinal and orthopaedic categories to further savings for schemes and members. In addition, MMED changed its strategy from the capital-intensive hospital wholesale model in favour of a model that focuses on our own branded products and select third-party products.

Managing medicine

Scriptpharm manages chronic, oncology and HIV medicine through arrangements with specific schemes, whereby Scriptpharm incentivises efficiency, cost control and preventative care. In the previous year, we embarked on a project of establishing an Independent Retail Pharmacy Network for the Group to create an organised, well-coordinated and managed pharmacy network. This project is progressing well, with the first groups contracted.

We have also embarked on an initiative to drive dispensing to our partner brands and to lower costs via a performance-based remuneration model for network pharmacies. This model is now fully developed; it is being implemented at all dispensers for POLMED and will be rolled out to other medical aid dispensers during the final quarter of 2022.

Outlook

The outlook for the cluster remains optimistic for the new financial year. We remain confident that we will continue to generate strong commercial returns while creating positive, longterm value within the pharmaceutical sector. Over the short to medium term, the cluster’s strategic growth initiatives will focus on realising additional value through special projects with Group collaboration and enhancing Group synergies. These projects include, but are not limited to:

• Increasing adherence to chronic medicine
• Growing sales volumes in oncology medicine
• Managing the strategic procurement of medicine and devices with Medscheme to bring the full value of the value chain to schemes
• Optimising value through the on-selling of medicine to other courier pharmacies
• Driving cost efficiencies to improve profitability and productivity through the automation project
• Increased focus on revenue diversification by creating new revenue streams