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Market Commentary - Pharmacy

Pharmacy Market Commentary – December 2015

Over the past year there has been substantial change in the Retail Pharmacy Sector.

We have often made the observation that Pharmacy in Australia is a mature industry. It is heavily regulated by the Government. The Australian Government is acutely aware of the cost burden associated with an ageing Australian population. A major contributor to the Government's health costs each year is the PBS. Overall the Government is seeking to drive down the costs of Pharmaceuticals whilst ensuring continued access for all Australians throughout the country. Ongoing Government reforms will no doubt continue to have a substantial impact in the future.

The Sixth Community Pharmacy Agreement (6CPA) commenced on 1 July 2015. This has presented both challenges and opportunities to the sector.

A major positive was the introduction of the AHI Fee (Administration, Handling & Infrastructure) which is paid to pharmacists for each item dispensed regardless of its value. This has effectively put a floor under pharmacist's remuneration and is adjusted for CPI each year. In addition, the Government has substantially increased its funding for services as part of the 6CPA. However, there is still some ambiguity as to what those services will be and how Pharmacists will be remunerated.

A challenge to the industry is the introduction of the ability for pharmacists to discount the co-payment on certain scripts by up to $1.00 at their discretion. This will take effect from 1 January 2016. A few major banner groups have already indicated they will be actively discounting and will be promoting this fact. This may ultimately place pressure on the majority of the industry to follow suit or risk appearing to be expensive. Our modelling indicates that a full $1.00 discount will likely erode some of the benefits gained from the introduction of the AHI fee. It is important to appreciate that this will not apply to all scripts and nor will all pharmacies engage in discounting. Some customers will also be disadvantaged, as the reduction in fees will cause them to take longer to reach the Medicare Safety Net.

A further challenge resulting from the 6CPA was the Governments decision not to increase the Wholesalers CSO, nor index it. This will place substantial pressure on the wholesalers to reduce discounts as well as funding support for the industry.

The question of deregulation of the Pharmacy Industry is often raised, especially in light of the recent Harper Report that recommended the removal of both ownership restrictions and location rules. In order to provide some certainty in the industry there will now be a formal review of the Harper Recommendations. The committee is to report back to the Government by June 2017. This will provide Pharmacists three years to plan for the potential outcome, at the end of the 6CPA. Negotiation between the Government and the stakeholders in the past have reflected benefits for both the Government as well as the Community and the profession. We would hope that all stakeholders continue to benefit from this approach.

Pharmacies in the future need to be clear in their offering to their customers and the nature of their Pharmacy. There are numerous models to adopt for Pharmacy operators. Each Pharmacy must consider how it will interact with its customer base in a way suitable for its location.

Currently demand for Pharmacies continues to exceed supply. This will continue to ensure the viability of Pharmacy and broadly lead to maintaining values associated with the underlying Industry. Nevertheless, it should be recognized that the changes over the past five years, including accelerated Price Disclosure has increased financial pressure on the industry. Pharmacists can no longer simply expect to open the doors of a Pharmacy or acquire an existing business and expect ongoing performance. Pharmacists need to continually adapt to the changing landscape whilst recognising at the same time that they are highly regarded members of their community.

Finally, over recent years Banks have reviewed their Policies including Loan to Value Ratio's (LVR) applicable to the Pharmacy Industry. This has led to loans typically being advanced on a Principal and Interest repayment basis. Purchasers will need to consider the amount of additional Equity they need to invest within each Pharmacy where LVR levels have been reduced. They will also need to consider the level of free cash flow available in order to meet debt repayments. This may have a softening of pricing within the industry in the future. At this stage we have seen little indication of this.

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