Bitter pill

Low growth, and the fact that major players have to fight tooth and nail for every bit of market share, has left the wholesale pharmaceutical market ailing. By ROBERT BRYANT

By Robert Bryant

Low growth, and the fact that major players have to fight tooth and nail for every bit of market share, has left the wholesale pharmaceutical market ailing.

Australia’s pharmaceutical wholesaling sector became a corporate battleground earlier this year when grocery supplier Metcash joined a number of private equity companies bidding for the right to buy Symbion Pharmaceuticals.

Metcash eventually dumped its bid, after the powerful sector customers – the pharmacists – said they did not want to deal with the grocery customer.

The failure of the deal highlights the squeeze the industry is in. On the one hand are the powerful pharmacists; on the other is the Government, which effectively regulates the industry via the Pharmaceutical Benefits Scheme, the mechanism under which the Government subsidises the cost of some medicines.

A key issue confronting the industry relates to the recent cuts to PBS wholesaler margins. As part of the Fourth Community Pharmacy Agreement, which came into force on 1 December 2005, there were a number of fundamental changes to the workings of the PBS, and particularly a reduction in wholesale mark-ups of PBS medicines. Further changes to the PBS, which came into effect from 1 August 2007, are also currently affecting on the performance of the industry.

As a result of this squeeze, average growth of 1.5% is expected in the five years to 2008-09. In recent years, industry participants have expanded their product portfolio to include both new biotech drugs and a growing range of complimentary or alternative medicines, demand for which is being supported by Australia’s growing interest in a more holistic approach to health and well being. Fierce industry competition has also affected this industry’s performance over the five year period.

The low levels of growth have created cut-throat competition in the sector, with major players fighting over every bit of market share they can grab.

Over the five year period to 2011-13, industry revenue growth is predicted to slowly expand by an average annualised rate of 1.8%. There is a direct correlation between the level of growth in the PBS and the rate of growth within the pharmaceutical distribution segment of the industry. The less (or more) money the Government puts in, the less (or more) the pharmaceutical wholesale business grows. With the Government keen to curb escalating health expenditure costs, the outlook for the sector is tough.

As before, industry profitability will be dependent on further efficiency improvements and the successful development of new, innovative value-added products and new markets.

In the immediate future a number of players will continue to boost their margins, partly through greater operating efficiencies (including improved stock and logistics management as well as through new IT platforms). It is anticipated that technology will play an increasingly important role in defining the profile of the industry over the outlook period, as will generic drugs.

Key success factors for operators in the industry

• Having links with suppliers. Alliances with manufacturers limits to some extent the potential damage caused by the trend to bypass the traditional wholesaler.
• Financial support from a downstream activity. Often the large pharmaceutical wholesalers provide financial support to pharmacies and consequently hold a degree of influence over pharmacy proprietors. This in turn helps to tighten the wholesaler’s control over the retail end of the chain.
• Having a clear market position. Significant market strength is becoming increasingly important as industry players face growing competition from players outside the industry.
• Access to the latest available and most efficient technology and techniques. The use of leading edge technology to stay competitive in the distribution of pharmaceuticals and in innovative new products for pharmacies.
• Having an extensive distribution/collection network. Full line wholesalers must employ an extensive low volume delivery network to deliver drugs to pharmacies. The nature of the Australian industry is unique given the distances between towns and the fact that deliveries often have to be made daily.

Industry segmentation

Major market segments

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