THE Department of Health has warned provinces to expect to pay more for medicines, as it plans to allow pharmaceutical companies to increase prices to compensate for the weak rand.

The development will put pressure on provincial health departments that, according to the Treasury’s intergovernmental fiscal review, spend about 8% of their budgets on medicines.

The rand has depreciated by 31% against the dollar in the past year and was trading at R16.8311 to the dollar late on Wednesday.

The weak rand has adversely affected domestic manufacturers who import active ingredients and importers of finished medicines.

"Margins on antiretrovirals are so low even a 2% shift (in the rand-dollar exchange rate) causes a problem," said Aspen Pharmacare head of strategic trade, Stavros Nicolaou. Aspen is one of the state’s key suppliers.

State tenders for medicines contain provisions for price adjustments based on a review of exchange rate fluctuations every six months, a system that worked well when the rand was relatively stable, according to the department’s head of regulation and compliance, Anban Pillay.

However, the recent volatility in the rand has put such pressure on manufacturers that in December they appealed to the Health Department to shorten the review period to three months. They argued that the six-month review window had the potential to undercompensate manufacturers if there was a sharp deterioration towards the end of the period. That, in turn, posed a risk to supply continuity because firms would not want to supply unprofitable products.

"The problem is that the retrospective averaging against a deteriorating exchange rate is not reflective of the spot rate at the time the increase is granted," said Pharmaceutical Task Group chairman Timothy Kedijang.

The group represents SA’s key trade associations for medicines.

On Wednesday, Dr Pillay said the department had agreed to a quarterly review of exchange rate movements when there was a currency swing of more than 5%. The department would consider adjusting the price of medicines on a product-by-product basis and expected these would be "single-digit" increases.

Provincial health departments had been alerted and were expected to reprioritise their budgets, said Dr Pillay.

Mr Nicolaou welcomed the development, saying Aspen hoped to increase the prices of some of the medicines supplied to the state as early as February 1.

"It is expected that the three-monthly review will better smooth out sharp differences in currency depreciation and will bring greater certainty and predictability to the supply chain," he said.

The move to cushion pharmaceutical companies against the depreciating rand is not confined to state sector sales. On Monday, the health department said it would grant drug firms an extra price increase later this year, in addition to the annual price increase of 4.8% announced earlier this month.