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Welcome to the first homepage edition of i2P for 2012.
In many ways it has been a slow start to the New Year because of having to deal with the “leftovers” from 2011.
One of those items for i2P was that a third-party provider to the site did not advise of a code change to the security section in our subscribe panel, creating a range of frustrated subscribers not able to get on board.
We apologise to all those potential subscribers who were unable to register with us in the second half of 2011, but if you try once more you should have no problem.

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Volume 2012 Number 1

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Community pharmacy’s crystal ball is fogging up

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Neil Retallick articles by this author...

Neil Retallick is a former General Manager, Merchandising, for National Pharmacies, the successful community pharmacy model owned by the Friendly Societies. Neil holds a Graduate Diploma of Marketing from Monash University, is a CPM and a graduate of the AICD.He began his career with Myer Stores Ltd and worked for FMCG companies including TIA (Sheridan) and Pacific Dunlop. Prior to these roles Neil worked for Cadbury Schweppes Drinks Division - Grocery, and Trimex Pty Ltd in Victoria in State management roles. He is currently Chief Executive Officer at the  Combined Dispensaries in Sydney and is a Member of the Advisory Board at Ehrenberg-Bass Institute for Marketing Science

At the Generics Conference held in Sydney a couple of years ago, when PBS Reforms I was the Government’s latest and greatest initiative to contain the cost of the PBS, a number of speakers addressed the impending impact of WADP or Weighted Average Disclosed Pricing.
Two of these speakers had developed mathematical models to chart the revenue and gross profit dollars that would be generated in the dispensaries of community pharmacies over the following years through to 2012 and 2013. In both instances, the speakers presented data that showed the dispensary revenue and gross profit lines decreasing quite dramatically as the effects of WADP took hold of PBS medicine prices.
These soothsayers saw gloom and doom in their crystal balls, or their spreadsheets if that’s what they preferred to use.

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A couple of years on and the impact of the WADP is again an area of intense interest to community pharmacy. The Federal Government has shifted the goalposts here in an endeavour to kick more goals and to kick them faster.

After the Generics Conference referred to above, I endeavoured to create a spreadsheet that would provide National Pharmacies with a forecast of its revenue and gross profit lines out to 2015. This document lists all relevant PBS drugs – originators and generics (or not). Then the dates of patent expiry for each originator are added. As of these dates, the mandatory reductions are actioned and then estimates of the discounts offered by the generics manufacturers are added. Then the rates of generic substitution for each generic supplier’s drug have to be estimated. This is necessary to be able to calculate the weighted average price. An important parameter here is the brand price premium, or not. A couple of years ago these were commonplace but are less likely in the future as original drug manufacturers fight to their last gasp to hang on to market share. Then, after 18 months, the WADP reductions have to be estimated. This determines the new dispensed price for the originator and the generic drug alternatives.

Having built this part of the model, the next challenge is to estimate the new terms that will be offered by the generic manufacturers after this first WADP price reduction... I’m not sure these companies themselves have decided what their responses will be in this situation down the track. Then the substitution rates have to be estimated again. And so the process continues until 18 months later.

Before long, my spreadsheet had more than 4,000 estimates. I choose to use that term rather than guesses. (And I haven’t mentioned the first month amnesty on discounts offered. The take-up on this opportunity impacts the WADP calculations significantly.)

Of course, my model is now obsolete as the Government has shifted the goalposts. Considerable re-work is required, The initial price drop is now 16%, the term is reduced from 18 months and there are three annual dates with destiny rather than two. But if the Government has moved the goalposts at one end, the originator manufacturers have dug up the posts at the other.

The originator manufacturers, faced with diminishing revenue streams because their new drug pipelines are at less than capacity, are changing their game plans. Their new battle cry is the tried and true “If you can’t beat them, join them”. These companies are trying to leverage the exclusivity of their patented drugs past the patent expiry dates in any way they can. This includes, but is not limited to, introducing their own generic version of the originator. Other strategies might include flooding the market with the originator sold in at heavily discounted prices or bundling the price of the originator with the price of the generic drug. Or bundling a group of drugs – this has been done by generic drug manufacturers in the past with mixed results. Regardless, these activities by the drug manufacturers will impact the modelling of the WADP.

The Pareto Principle is important here too. Clopidogrel is coming off patent now. This is a significant drug and the competitive pressure amongst suppliers has built up quite a head of steam. The next significant drug is the Queen Bee, the mother of them all – Lipitor. All else pales in comparison to the impact pricing activities around this drug in mid-2012 will have on community pharmacy profitability. Or will we have to wait that long?

Polish up that crystal ball and turn down the lights.

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