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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.
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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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Not a Tough Budget Because the Government has Already put the Screws in Place

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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

There were many sighs of relief on Budget night from pharmacists who had expected the Government to further reduce the profit margins provided by the PBS. Talk of steep reductions in the prices of a hundred or more high volume medicines did not eventuate, leaving many pharmacists believing that the Government was beginning to understand that there is only so much that can be wrung out of the current PBS structure. How wrong can a pharmacist be?

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The Generic Medicines Conference held in Sydney a couple of weeks ago should have taken the wind out of the sails of any pharmacist who attended. A key deduction for community pharmacists is that the Government left the PBS and drug pricing generally alone in the Budget was because it has already put in place a process that will, over time, squeeze almost the entire margin out of it.

The mechanism introduced as a part of the PBS Reform package called Weighted Average Disclosed Pricing will, over the next six or so years, eliminate most of the profit margin available to community pharmacists through the discounts offered by manufacturers. The Honourable Nicola Roxon MP set the tone early when she stated that the Government had no intention of “propping up” with tax-payers money those in the pharmacy industry who could not sustain themselves. In response to a question, the Minister for Health and Ageing indicated this applied to both pharmacists and generic drug manufacturers.

Peter Davey is a Director of Illuminate Health Consulting. In his presentation, he pointed out that disclosure arrangements have been used to great effect in countries such as Japan, Taiwan and the United Kingdom. Peter’s modelling of the cost impacts of the PBS Reforms required a series of assumptions, none of which seem unrealistic. These assumptions about the levels of discounts available to pharmacists today and the listing prices of new brands and new drugs were combined in his modelling with the known patent expiry dates of PBS listed dates to forecast the growth in units and dollars through to the end of fiscal 2015. This model has unit growth in fiscal 2009 of 2.5% and revenue growth of 5.3%. By the middle of 2015, this growth has maintained a unit increase of 2.6% but the revenue growth is 0.0%. The unit increase will be completely offset by reductions in the prices of PBS medicines. Implicit in this number is an acknowledgement that the discounts available to pharmacists will also be reduced to next to nothing.

I think we can assume that in the same way that community pharmacists today share the profit margin on PBS medicines with the manufacturers, this sharing will be maintained through this period. The problem is that the profit pie keeps getting smaller – presumably until there is less than a 10% margin remaining. At this point the discounts provided by manufacturers will never trigger another reduction. The last manufacturer standing in this scenario will be the one with the lowest cost structure as it will be able to sustain the lowest selling price in the market.

On Day Two of the Conference Andrew Goodsall, Senior Healthcare Analyst with UBS, reinforced the predictions made by Peter Davey. Andrew presented a comprehensive review of the healthcare market in Australia, the performance of some of the key participants in it over time and the growth of the generic medicines market. A key conclusion of the modelling done by UBS with regard to the impact of Weighted Average Disclosed Pricing was that by the middle of 2015 growth of PBS revenue will be - zero. Snap!

Andrew pointed out that although the generics share of the PBS pie would increase through to 2015, pharmacists would need to increase their substitution rates across all of these generic medicines to optimise their profitability.

The savings to the Government are counted in billions of dollars over this period, perhaps as much as double their initial estimates of the savings implicit in the PBS Reforms. The majority of these savings will most likely be drawn from the generic drug manufacturers, but Peter Davey estimates that community pharmacy will ‘lose’ more than a billion dollars in revenue over the journey.

Now there may be those amongst you who remember that a profit growth strategy for community pharmacy is an increased focus on the front of shop business. A trend identified by several speakers was the emergence of the discount pharmacy model and intrinsic to this development is a continuing reduction in the profit margins available from OTC medicines.

By the end of the conference a pretty gloomy picture had been painted for the future of community pharmacy in Australia. Certainly if we overlay the Global Financial Crisis, the hugely increased Government debt levels and an election in late 2010 the stage is set for the most challenging Community Pharmacy Agreement ever - for all parties. We live in interesting times.

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