Question $3(25$ Marks$)$

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 $40$c in a rand from the liquidators, and the balance of

R$1,5$ million was written off. Synche had a credit limit of R$2$ million.

$3.$ Operating profit includes:

Year $20202019$

Credit losses

R$000$ R$000$

$4142947980$

MBA$5903$

OCT$/$NOV $2023$ EXAMINATION

$6$

$4.$ 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

R$65$ 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 pharmacychains 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 $2026.$

MBA$5903$

OCT$/$NOV $2023$ EXAMINATION

$7$

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 R