The new pharmacy operations of listed health and beauty retailer New Clicks Holdings continue to show a loss four months into the company’s 2005 financial year, with the government’s new dispensing-fee regulations eating into margins.
This is leading the company to focus on rolling out pharmacy dispensaries in larger Clicks stores rather than opening new, smaller pharmacy-based stores, according to group leader Trevor Honneysett.
Honneysett, who was addressing shareholders at the company’s annual general meeting in Cape Town on Monday, said that unless a suitable outcome is achieved on the question of dispensing fees, dispensary operations will not be a significant contributor to New Clicks’ profits.
However, he added, the dispensaries will ensure greater footfall in Clicks stores, thus increasing sales volumes across the brand.
Currently all dispensing fees and medicine-pricing regulations are in limbo across the country after the Supreme Court in Bloemfontein ruled late last year that the government’s new legislation is invalid and of no force and effect.
This followed court action by New Clicks, hospital group Netcare, the Pharmaceutical Society of South Africa and others, on grounds that the imposed dispensing fees of R26 for medicines costing more than R100 and 26% for those less than R26 were too low, causing many pharmacies to close down.
The Department of Health has submitted an application for leave to appeal the ruling to the Constitutional Court, which will be heard on March 15. If the government is successful in its application, the appeal will be heard by the Constitutional Court the following day.
“Let me clarify at the outset that the reason we went to court was because the pricing regulations implemented by government resulted in the dispensaries within pharmacies making a loss,” Honneysett told New Clicks shareholders.
“While in the Clicks stores where we introduced dispensaries we were able to make a reasonable return, it was driven primarily from additional volumes through the rest of the store.
“We have seen that where a dispensary is put into a Clicks store, it increases the volumes across the whole store. We are therefore focusing our efforts on this format of store.
“We continue to battle in smaller stores and the regulations, if left unchanged, would have resulted almost certainly in smaller and rural pharmacies having to close down. We would, however, like the situation to be cleared up as quickly as possible, as we do believe it is neither in the best interest of the consumer or the service providers to have this ongoing chaos.”
Currently the company has pharmacy dispensing operations within 81 of its stores across various brands and formats, including 39 still under the Purchase Milton & Associates banner, 12 in Hyperpharm and 30 under the Clicks brand. However, only 10 of these Clicks stores are in the “optimum” large-store Clicks format, the group leader disclosed.
New Clicks plans to add another nine dispensaries across the group this year, with three new licences already approved by the government but not yet implemented. The company has submitted applications for a further 52 pharmacy licences and is awaiting government approval on these.
Commenting on the year ahead, Honneysett said the group remains positive in the long run on pharmacies, as the experience of the converted Clicks stores confirmed that having pharmacies as a category in Clicks does work.
As the pharmacy operations are integrated into the existing Clicks infrastructure, overhead costs will be reduced over time and the group will be able to move into a position were it can make some profit.
However, he added, New Clicks has been, and will continue to be, challenged to improve performance in a below-zero inflationary environment.
“Our commodity categories and brands trade mostly in a segment of the economy where every day we are challenged to beat our food-based competitors and, more recently, large drug discounters.
“We continue to focus not only on operational activity, but also on capital management, and have asked shareholders for permission to carry on with share buy-backs in order to improve returns on capital.” — I-Net Bridge