Small retail pharmacies will soon be extinct in South Africa unless new regulations governing medicine pricing and dispensing margins are changed, according to the group leader of listed health and beauty retailer New Clicks Holdings, Trevor Honneysett.
At the same time, he said, based on recent evidence, the government has not succeeded in reducing medicine prices with the legislation.
New Clicks owns such brands as health and beauty chains Clicks and Discom, The Body Shop, music chains Musica and CD Wherehouse, pharmaceutical wholesale distributor UPD and pharmacy chains Link, LinkMax and Purchase Milton and Associates (PM&A).
The group is in the process of rolling out pharmacy dispensary services in its Clicks stores and converting its PM&A pharmacies to Clicks-branded pharmacies.
In an attempt to reduce medicine prices for consumers, in August the South African government introduced legislation setting the dispensing fee for pharmacies at 26% for medicines costing less than R100 and R26 for medicines costing more than R100.
It also forced medicine manufacturers to set a ”single exit price” for their medicines, thus making them sell their products at the same price to everyone and eliminating previous discount, rebate and other schemes resulting in a complicated pricing framework.
New Clicks has joined with the Pharmaceutical Society of South Africa and other independent pharmacists to contest the regulations in court.
They lost the first round of the battle, with the Cape High Court ruling in a split decision in August in favour of the government to uphold the current regulations.
However, they opted to appeal the decision, and on September 20 the High Court reserved judgement on that appeal, with no date yet set for the court to decide if it would allow a hearing of the appeal case.
Presenting New Clicks’s annual results in Cape Town on Thursday, Honneysett told analysts and the media that he is confident that the company’s own model of introducing pharmacy dispensaries into its own large Clicks retail stores will be profitable. However, smaller retailers will not be able to survive the drastic 44% reduction in gross margins forced on the pharmacy industry by the new legislation.
He explained that the new pharmacy dispensing fees have effectively lowered the pharmacy industry’s gross profit margins from an average of 29% to 16%, or sometimes less (if a pharmacy has a much higher proportion of sales of more than R100). This resulted in a 44% fall in the industry’s average gross profit margin.
While larger groups such as New Clicks will be able to absorb this decline by improving efficiencies and cutting costs across its wide chain of stores — as well as by boosting sales volumes at existing Clicks stores by introducing pharmacy dispensaries — smaller pharmacies will not be able to survive, Honneysett was convinced.
This is because they lack the capacity to improve their sales volumes or cut costs enough to compensate for the lost margin. Even the introduction of administration fees, as outlined by the government recently, will not make up for the 44% decline, he said.
”Small retail pharmacy will soon be extinct in South Africa unless something is done,” Honneysett noted. ”Even we are being forced to focus mainly on large stores [Clicks stores] where we can leverage costs.
”Retail pharmacy is bearing the brunt of the government’s policy of reducing medicine prices, as it is expected to absorb a 44% drop in gross profit, while not receiving any additional volume from dispensing doctors.
”Also, the Department of Health is not dealing with administrative capability and capacity — it is implementing complex legislation without the experience or capacity to do so.”
He noted that some medicine manufacturers had reduced prices subsequent to the introduction of the single exit price for medication at the manufacturing level.
However, New Clicks’s actual experience had shown that the prices it had paid for medicine subsequent to the introduction of the single exit price in August had risen by 5% on average, compared with prices in the first six months of 2004.
”We haven’t seen the government’s intended reduction in medicine prices based on the single exit price come through,” commented Honneysett. ”In fact it looks as though it has raised medicine costs for consumers. And manufacturers have remained very quiet on the issue.” — I-Net Bridge