Published on 18/04/2016 by Punchmedia

Demand for Pharmaceuticals Rises

Over the past five years, there have been several favourable conditions driving the underlying demand for pharmaceutical and medicinal products, including an ageing population and rising health consciousness. Despite this revenue is expected to fall slightly in inflation-adjusted terms, by an annualised 0.3% however expected growth of 1.7% in 2015-16 will bring industry revenue up to $15.5 billion. According to the Pharmacy Guild, average dispensing revenue in 2015-16 will be $1.13 greater per script as a result of Pharmaceutical Beneftis Scheme (PBS) terms. Of even greater significance is the introduction of a new tiered Administration, Handling & Infrastructure fee, which means that there is now a permanent floor for dispensing remuneration, which serves to effectively de-link pharmacy remuneration from the ongoing effects of price disclosure. Moreover, the AHI fee is set to increase each year as a result of CPI indexation to the benefit of the industry. However, the full benefits of this could be partially offset by the introduction of an optional co-payment discount of up to $1.00 which came into effect on 1 January 2016. This is the first time that a discount on the patient co-payment has been allowed. Depending on the extent to which this is taken up, this represents a potential cut to pharmacy revenue. In the first two months, roughly 30% of pharmacies offered the discount.

Profit

Ongoing price disclosure cuts for some of the industry’s most commonly prescribed drugs have eaten into industry profit margins and revenue growth. Pharmacies derive a large proportion of their net profit from dispensing prescription medication, with a smaller proportion derived from front-of-store sales. Historically, prescription medicines have prices or margins that are set by the government via the PBS and Community Pharmacy Agreements. These prices have fallen over the past five years, particularly with ongoing PBS reforms. According to the Pharmacy Guild, price disclosure cost the average pharmacy $90,000 in reduced net profit before tax in 2014-15. These cuts have occurred at a time when both wage and rental costs have risen.

Intensifying Competition

New internal and external competitive forces are changing the industry’s operating backdrop. Externally, the industry is facing increasing pressures from supermarkets, niche health and beauty retailers, discount department stores and general merchandise retailers. Due to scheduling changes, non-pharmacy outlets are now able to sell some items that were once only stocked at pharmacies - and they are able to do so at competitive prices. Non-pharmacy stores are also increasing their range of health and beauty products, which has heightened competitive pressures for front-of-store sales in pharmacies. Another internal development during the period has been the proliferation of low-cost, warehouse-style pharmacies with aggressive pricing strategies and consistently low prices. These pharmacies represent a threat to the traditional community-pharmacy business model. The emergence of online pharmacies has posed yet another threat. In addition, the growing number of unapproved pharmacies (i.e. those not licensed to dispense medicines through the PBS) has grown over the past five years. These pharmacies are active in the non-prescription medicine segment, selling over-the-counter products and general retail products.

Changing Business Models

In response to increasing competition, pharmacies are implementing new business models to ensure their survival. For example, pharmacies have strengthened their focus on providing community health services such as drug information, clinical interventions and preventative care for patients with chronic conditions, and marketing medication reviews for doctors. The tough retail conditions in the industry have stimulated other strategy changes, including a greater focus on the use of social media and loyalty cards, and the implementation of e-commerce platforms. Traditionally, the industry has been dominated by buying or marketing groups, but this situation is gradually changing. Over the past five years, the franchise model has become increasingly commonplace.

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Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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