Medic Group SA Limited (MGSA) is a pharmaceutical group based in South Africa and listed on the Johannesburg Stock Exchange (JSE). It was started 80 years ago by five brothers as a small pharmacy in the city of Johannesburg. They gradually expanded the company’s operations, eventually turning it into a pharmaceutical group that first listed on the JSE in 1970. The group’s operations comprise a chain of retail pharmacies and three manufacturing facilities in South Africa. MGSA manufactures an extensive range of branded and generic prescription drugs, in addition to some over-the-counter medicine. These products are distributed through multiple channels, including the group’s own pharmacy chains, but also other pharmacies, doctors, hospitals, and convenience stores. In recent years, MGSA has revised its vision: “To be recognised as a leading, world-class, branded healthcare company”. In pursuit of this vision, the company intends pursuing organic growth opportunities as well as acquisitions in selected markets.

Additional information relating to Medico Group SA

1. Eighty percent (80% of MGSA’s total revenue is derived from credit sales. The company’s formal credit policy states: • Credit limits are set for individual customers based on their credit rating. Sales to customers may not exceed their credit limits; and • Total exposure to a single debtor may not exceed 4% of the total outstanding accounts receivable balance.

2. During the financial year ended 31 March 2020, one of MGSA’s debtors, Synche Limited, was liquidated. MGSA received 40c in a rand from the liquidators, and the balance of R1,5 million was written off. Synche had a credit limit of R2 million.

4. In a recent Broad-Based Black Economic Empowerment verification, the group was rated as a Level 5 Contributor.

5. Despite the decrease in profit from 2019 to 2020, the management of MGSA believed that profit after tax will grow by 9% per annum from 2020 onwards (excluding the effect of any possible merger or acquisition).

6. A dividend of 151 cents per share was declared in the 2020 financial year. In terms of the group’s dividend policy, a constant dividend pay-out ratio is maintained.

7. MGSA had 100 million shares in issue on 31 March 2020, which are currently trading at R65 per share.

8. The current South African corporate tax rate is 28%.

Industry background information

A central driver in this industry is the high cost of discovering, researching, and developing pharmaceutical drugs. Yet only a very small percentage of the compounds investigated are eventually approved for human consumption. The pharmaceutical companies normally apply for patent-protection of the drugs to protect their investments. These patents afford the holder an exclusive right which remains valid for a maximum of 20 years from the date of filing. The group will in the coming years see many patents protecting several prominent drugs expire. This loss of patent protection will likely affect future drug-pricing and is expected to create a higher demand for generic medicine. Notwithstanding these challenges in the industry, pharmaceutical companies in general still perform very strongly. The available lucrative government contracts for HIV/AIDS, tuberculosis and diabetes medication serve as key drivers for the industry. In South Africa there is strong competition between pharmacies, with dominant retail pharmacy chains and courier pharmacies controlling a large market share. The industry is further grappling with the proposed National Health Insurance (NHI) scheme which aims to provide universal access to quality health care for all South Africans as enshrined in the Constitution. The NHI was first introduced to the National Assembly in August 2019 and will then go before the National Council of Provinces. It is planned to be implemented in phases from 2026.

South African industry regulation and legislation

The pharmaceutical industry in South Africa is highly regulated and legislated. Legislation, such as the Consumer Protection Act and the Medicines and Related Substances Act regulate the marketing, distribution, and packaging of pharmaceuticals. The Medicines and Related Substances Act also regulates the price at which certain medicines and scheduled substances can be sold, and further stipulates a principle known as “Single Exit Price”. The “Single Exit Price” dictates that medicine manufacturers may only sell products and variants thereof at a single price to all customers, regardless of sales volume. In addition, the health ministry releases a government notice annually stipulating the maximum annual price increases. The government has established the South African Health Products Regulatory Authority (SAHPRA) to replace the Medicines Control Council (MCC). SAHPRA is the regulatory authority of South Africa responsible for the regulation of health products intended for human and animal use; the licensing of manufacturers, wholesalers and distributors of medicines, medical devices, radiation emitting devices.

Required:

3.1. Identify the key strategic risks facing MGSA and indicate ways in which the risks could be mitigated with reference to the pharmaceutical industry and the South African context. (10)

3.2. Draft a formal report directed to the directors of MGSA, highlighting the results of:

 a. An assessment of the current opportunities and threats that could be linked to the group. 

 b. Shortcomings in the group’s current vision statement, if any. Incorporate knowledge of the pharmaceutical industry in your answer, and specifically consider the South African context.

3.3. Discuss the benefits and limitations of MGSA’s current dividend policy
 

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3. Operating profit includes: Year Credit losses 2020 R'000 41 429 2019 R'000 47 980 3. Operating profit includes: Year Credit losses 2020 R'000 41 429 2019 R'000 47 980

Answer rating: 100% (QA)

31 Key Strategic Risks and Mitigation for MGSA Risk 1 Dependency on Credit Sales Mitigation Implement stricter credit limit assessments diversify reve... View the full answer