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EDITORIAL COMMENT: Taming pharmaceutical sector right medicine

Dr Mangudya

The pharmaceutical sector has long been the most defiant of all bidders on the foreign currency auctions, buying its foreign currency for medicines at official rates and selling using the black market exchange rate.

Reserve Bank Governor Dr John Mangudya recently fingered the sector as the leading offender of this practice when briefing a Parliamentary portfolio committee, and is now seeking enhanced legal powers to deal with all bidders who pull this stunt.

Pharmaceuticals are obviously high on the import priority list, and they feature every week in both the main auction, where major wholesalers and manufacturers obviously get their currency, and in the SME auction where the smaller businesses, such as chains of pharmacies, can dip into the pool.

So medication should be largely costed at auction rates right down to retail level.

There are odd exceptions. Some patients need special drugs which have to be individually procured, after the regulator has given permission, and there are occasional shortages of registered drugs that have to be urgently imported. 

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But generally pharmacies should be operating in the total legal market environment.

Medical aid societies and health insurers have added their weight to local currency buying, insisting that pharmacies accepting medical aid use Zimbabwe dollar prices, although there is some false invoicing. 

But in any case pharmacies tend to cost in US dollars and then convert to these local prices, using the black-market rate.

Part of the problem is the near monopoly or tiny group of importers of many generic drugs, importers who have managed to get exclusive dealerships from major manufacturers of these drugs. 

This was so severe that when others figured they could undercut the prices by importing from South African wholesalers, accepting that wholesaler margin on the producer price, but still selling cheaper in Zimbabwe, steps were taken to stop the South Africans supplying. 

In many cases, retail pharmacies get price lists from wholesalers with recommended retail prices, although the competition in the retail sector does mean that some accept more modest margins.

Many retail pharmacies also have two businesses, registered medicines, both for prescription and over the counter, and the items that give profit cream, like perfumes, make-up shampoos, and other goods that are unlikely to be on the priority list. 

Some manage this well, with separate tills and counters, even separate sections in the shop, to keep the accounts separate. 

For a start there are tax differences that make this important, but secondly the pharmacist might have to rotate US dollars received from customers for the fancy goods, while just buying the medicines with Zimbabwe dollars from medical aid payments and customer cash.

While no-one is likely to get fanatical about weird financing for perfume, the added cost of using black-market exchange rates for essential medication is something that must be stopped.

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Dr Mangudya must have been very certain of his facts before speaking to the Parliamentary committee. Although everything in those meetings is privileged, meaning no one can sue for defamation or take other legal action, the Governor has his own reputation to consider.

Everyone in the business knows what is happening, and why it is happening. And this is one reason why Dr Mangudya’s plea for extra legal powers needs to be given a legislative priority. 

His one sanction, banning such bidders from the auctions, is not really an option, or at least not a simple option, when it comes to pharmaceuticals. For a start disrupting the supply chain might well be dangerous unless alternative supply chains are already in place and working. 

The retail sector, in any case, are not bidders, or at least not prominent bidders, on the auctions, so there is absolutely nothing he can do to stop the retailers using black market prices. Banning someone who does not bid in the first place achieves nothing.

In theory, the intense competition in the retail sector should fix the problem. You get pharmacies next door to each other and few city blocks in central Harare do not have at least one pharmacy and in some cases several. Suburban shopping centres are just as bad. 

But that level of competition means that customer numbers are on the low side, so there are pressures to raise margins to cover overheads on low volumes. And “as everyone does it” using the black market rate seems the simplest.

Right now, the Ministry of Health and Child Care and the Ministry of Industry and Commerce are keen on resuscitating Zimbabwe pharmaceutical manufacturing industry and then expanding it so that most essential drugs are made locally, although obviously there will still be imports of essential raw materials from major manufacturers. 

But if this is done in the black-market environment we will still have the added costs and we will not be solving the problems. Exports to neighbours will be impossible if they are overpriced, yet that could well be a valuable market if we can by importing, say, some antibiotic in 100kg bulk packs and making up the tablets locally cut the costs.

Authorities took little action in the days of the worst currency shortages, since paying black-market rates was about the only way full supplies were available, but with the auctions this is no longer the case. 

Supply chains are now good, so price cheating is no longer required. Pressure needs to be applied and if that pressure criminalises buying with auction funds and selling at black market rates this must be done.

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When it costs more to cheat that behave responsibly, people behave responsibly and the huge advantage of such legal changes means that you can enforce responsible behaviour without messing up the supply chains.

If some company director or pharmacist is in jail, others in the same business can do the work, and in any case the legislation could start with fines for first offenders that are around, say, twice the extra margin by fiddling rates, making such practices not just unviable, but financially crippling.

HERALD