The PBS reforms which began in April 2012 are almost a year old. At the time there was much industry wide discussion and opinion on how they would affect Community Pharmacy.
Some accounting groups argued the weighted average disclosed price (WADP) reductions would lead immediately to many pharmacy businesses failing while others modelled that initially extra profit would be available in 2012, before the tightening would commence in 2014 when net profit would be squeezed in an ongoing “python like” grip.
So where are we now?
Well the first data is now beginning to appear for the first two quarters of financial year 2013 and it is clear that whilst turnover dollars have been sluggish, gross profit dollars have climbed strongly. The results have been even stronger for those pharmacies that have been able to increase their generic substitution rates. An 80% generic substitution rate is the, minimum level, hurdle in this new world.
However even Kos Sclavos himself admitted that “More pharmacies have gone bankrupt in the past year than in the previous ten put together”.
So who was right?
Well neither really.
Those promoting the thought that more pharmacies would immediately go bust because of the WADP reductions were not recognising the correct nexus. The seeds for the recent bankruptcies were sown over 5 years ago when the banks were fighting for market share in the pharmacy industry. It was a time when it was not uncommon for the bank to accept valuations based on forecasts of future growth and then extend 100% of this valuation.
Then saddled with this high financial leverage some of these pharmacy businesses were not able to develop or evolve quickly enough through the blows of the considerable economic and regulatory changes that occurred from 2009 to current days. With more serviceable levels of debt the current level of bankruptcies would be much lower.
Those that predicted profits would go up in 2012 through 2013 and then come down are correct so far. However I believe their overall view that the moment of doom is simply being postponed is categorically wrong. They have not factored in the continuing evolution of the industry.
Whilst this is a complex process with many layers which are both internal and external there are two factors which are critical and on their own will promote a strong and vibrant pharmacy industry future.
The first factor is that Pharmacy is the first line of health provision for Australia. Pharmacists performing the critical service of Community Pharmacy will not only ensure that future Pharmacy Guild Agreements will maintain the basic structure of the current Agreement but can now at the same time generate valuable new income streams.
The Pharmacy Practice Incentive (PPI) Program alone can increase the income of a single pharmacy by as much as $100k per year. There are numerous other Programs and Incentives that make both Community Pharmacy stronger and provide income. I have seen successful examples of programs being undertaken with no increase in total dollar wage costs.
The second factor is external and fundamental. We are all getting older (I should have been a brain scientist) and by 2050 there will be a 70% increase in people over 65 compared with today. Couple this with increased drug technology and availability on a product that has at least some characteristics of inelastic demand and the argument is clear.
In conclusion, stakeholders in the pharmacy industry will need to understand the WADP which will lower gross profit dollars on certain molecules through 2014 and beyond. However by continuing to evolve their businesses which will include increasing the Program and Incentive income streams they will increasingly, year on year, operate in an environment which will have strong increasing demand.
by Alister Willcox – Director of Valuations, Armstrong Business Valuations