S.African drugmaker Adcock warns of margin pressure in coming months

JOHANNESBURG (Reuters) – South African drugmaker Adcock Ingram said on Tuesday its margins will be under pressure in the next 12 months as government-approved price increases on controlled drugs will not be enough to cover local inflation and the cost of power shortages.

In December, the government allowed a 3.28% hike in the price of controlled drugs, inviting strong opposition from drugmakers.

Adcock CEO Andy Hall said the local currency had depreciated by 7% in the six months to December, hitting imports of raw materials to make medicines.

It had to raise wages above inflation and spend 22 million rand ($1.21 million) running diesel generators, he said.

“We think there will be pressure on gross margins, we think it will likely shrink over the next six to 12 months.”

Adcock, which sells half its products under government-regulated prices, posted a gross margin of 35% in the first half ended December 31.

South African companies have identified reduced hours of electricity as one of the biggest factors that could hurt growth and profitability.

South Africa’s state-owned utility Eskom’s electricity production has dropped to where it was two decades ago amid rising demand, forcing it to implement rolling blackouts, sometimes for up to 10 hours a day.

This comes at a time when the country faces food inflation of 13% and youth unemployment of up to 45%.

“Things are uncertain at the moment and we are concerned,” Hall told Reuters in an interview.

Adcock will reduce its gross margin slightly based on its broad portfolio of products and higher prices for consumables, over-the-counter products and hospital supplies, he said.

The company sells a mix of over-the-counter and prescription drugs, consumer products and hospital supplies.

It posted a headline earnings per share, a measure of profit, to 289.9 cents, a 20% increase, with its shares up 2% at 0930 GMT against a broader index that was down a percentage point.

($1 = 18.2083 rand)

(Reporting by Pramit Mukherjee. Editing by Jane Merriman)