Dispensing health and wealth: Pharmacies maintain mature growth as competition intensifies

The pharmacies industry plays an important role in the provision of community primary health care.

The nation’s 5,225 community pharmacies provide services such as medication management information, advice on minor ailments and over-the-counter (OTC) medicines, and preventative care services. They are also the primary distribution points for prescription and scheduled OTC medicines.

The industry is highly fragmented and made up of a large number of individual operators. Despite this, the industry makes a significant contribution to the Australian economy as it generates in excess of $12 billion in revenue annually. In 2009-10, community pharmacies supplied 183 million Pharmaceutical Benefits Scheme (PBS) scripts, up from 181.8 million scripts in the previous year.

With a growth rate of 1.8% per annum over the past five years, the industry is expected to generate revenue of $12.4 billion in 2011-12, up 2.1% from 2010-11. During the year, the performance of the industry will be influenced by ongoing changes associated with the fundamental reform process occurring in the PBS; in April 2012 the price of at least 180 PBS medicines will be cut by a minimum of 23.0%.

Industry at a Glance

Pharmacies in Australia in 2011-2012

The fallout effects associated with the decision by Australia’s largest pharmaceutical manufacturer Pfizer to use a direct distribution model will also influence the industry, with a number of pharmacies continuing to experience supply problems.

In the next five years, industry growth will be driven by an ageing population. However, slower growth in the PBS (as a result of the ongoing reforms that will cut the cost of the scheme by $1.9 billion over the five years through 2015) will restrain growth. Industry revenue is expected to increase by 2.4% per annum over the next five years, reaching $14.0 billion in 2016-17.

Products and Markets Segmentation

There are two streams of pharmacy practice in Australia, namely clinical (or hospital) pharmacy and community pharmacy. According to the Australian Institute of Health and Welfare, community pharmacies dispensed $11.0 billion worth of prescription pharmaceuticals in 2008-09, compared with $2.4 billion for public and private hospitals.

This report is concerned with community pharmacies, which are considered an integral part of Australia’s healthcare system. Community pharmacies provide a wide range of products and services, the most important of which is the dispensing of prescription medicines and pharmacy-only medicines (OTC drugs).

According to legislation that dates back to the late 1800s, only pharmacies and hospitals are able to dispense prescription medicines. Since the start of the PBS in the 1950s (which today covers about 90% of prescription products dispensed), only pharmacies that have been granted the necessary regulatory approval can dispense PBS products. In addition, community pharmacies sell a variety of therapeutic substances and aids (including vitamins and minerals), baby needs, beauty products, optical products, giftware and film development services.

There are three main product categories. The first is prescription medicines. By law, the sale of these medicines is restricted to pharmacies only and includes PBS subsidised prescriptions, unsubsidised PBS prescriptions and private prescriptions.

The second category is non-prescription medicines and other medications. These include products that are restricted to pharmacies but do not require a prescription, including those products classified as Schedule 2 (pharmacy medicines) and Schedule 3 (pharmacist-only medicines). Sudafed and Claratyne are examples of such products. Thus products falling within this category include OTC medicines and complementary and alternative medicines, including vitamins, minerals and herbal, aromatherapy and homeopathic products.

Also known as self-medication products, OTC medicines may be sold directly to consumers without prescriptions. They can be defined as medicines specifically designed to treat symptoms of common, minor and self-limiting ailments that do not require a medical diagnosis. There has been a growing trend towards the production and use of complementary medicines.

The final category is general retail products, which includes baby products, bandaids and bandages, beauty products, cosmetics, perfumes, body care and hair care products, sun care products, general health items, film development and optical products. Within this segment, cosmetics and toiletries are estimated to account for about 5%, while baby care products are estimated to account for less than 2%.

As an indication of the importance of prescription medicines, during 2008-09 about $8.9 billion was spent on pharmaceuticals for which benefits were paid, while total estimated expenditure on pharmaceuticals (excluding complementary and alternative medications and OTC medications without prescriptions) was $13.4 billion. An additional $4.2 billion was spent on OTC medicines.

The actual sales mix varies with each pharmacy and is in part determined by its location (e.g. in a shopping centre, shopping strip or medical centre, in a city or rural area) and also by its size. For example, pharmacies located in shopping strips or medical centres tend to derive a greater proportion of their sales revenue from the more traditional activities of drug dispensation, while pharmacies located in shopping centres have a much greater emphasis upon front-of-store retail sales. Pharmacies located in rural areas may have a more balanced sales mix between the two. The mix also varies in line with the business model being pursued by the pharmacy and on the basis on which it has chosen to compete. For example, Terry White Chemists are focusing on a 50:50 ratio, as are Amcal Max stores.

Changing product profile

There has been a change in the product profile of the general pharmacy over the past few decades. In 2001-02, dispensary sales accounted for about 70% of pharmacy sales, up from 50% one decade earlier and 38% in 1981. Front-of-store sales accounted for the remainder. This trend favouring prescription drugs and pharmacy-only medicines rather than toiletries, OTC products and other front-of-store sales dates back to the 1970s, when pharmacies began to lose a large number of sales of toiletry items to supermarkets.

In the following two decades, these pressures intensified as supermarkets and mass merchandisers expanded their product ranges to increasingly include OTC products and basic cosmetic lines.

Pharmacies have lost further market share in these product segments in the past five years, in line with the emergence of a range of new health and beauty chains covering each price segment of the market. For example, pharmacies are now estimated to account for about 10% of all sales of cosmetic and toiletry products, down from 15% in the mid-1970s.

Pharmacies have begun to refocus attention on their front-of-store operations in an attempt to wrestle the strong and consistent trend away from OTC sales. This has resulted in the introduction of new business practices and some pharmacies have reviewed the range and presentation of products and implemented new marketing and advertising strategies.

Sigma’s new retail-focused pharmacy brand goes by the name of Amcal Max. Offering a broader range of consumer products, Amcal Max stores are expected to earn as much as 50% of their revenue from front-of-store sales, with the remainder derived from the more traditional activities of dispensing prescriptions.

Several pharmacies have moved into higher margin goods and services such as film, photocopying and passport photo services. According to ACNielsen, pharmacy front-of-store sales were valued at $3.9 billion in 2006.

There has been gradual growth in non-prescription medicines, including complementary medicines, in line with changing consumer attitudes and a growing acceptance of alternative medicines due to a more holistic approach to health and general wellbeing. According to ACNielsen, one of the fastest growing product categories within the front-of-store segment has been the vitamin, herbal and mineral supplement product group. Therapeutic skin care sales have also increased.

According to the Australian Self-Medication Industry (ASMI), sales of registered and listed OTC and complementary medicines through both pharmacy and grocery channels are currently estimated at $1.7 billion per annum, after strong growth in the past five years.

Major Players

Led by Australian Pharmaceutical Industries Limited with a market share of 12% followed by Sigma Pharmaceuticals Limited (6.5%) and Zuellig Healthcare Holdings Australia Pty Limited (5%).

Industry Outlook

Long-term underlying economic, demographic and social trends bode well for the pharmacies industry. In particular, an ageing population, changing community attitudes to health and skin care, various psychological motivations and ongoing product development and innovation are expected to contribute to the continued moderate growth of the industry.

However, growth rates will be constrained by flat PBS volumes (which will have implications for the quantity of drugs dispensed) and the loss of market share to external forces. Overall, industry revenue is expected to grow by 2.4% per annum over the next five years, to reach an estimated $14 billion in 2016-17. In 2012-13, revenue is forecast to grow by 2.3%. 

As in the past, the regulatory nature of the industry will provide a framework for the industry’s growth profile. The continued operation of the PBS and government policies designed to cap healthcare expenditure, including cutting government subsidies of prescription pharmaceuticals, will influence the industry via the level of revenue received from dispensary sales.

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