How price cuts impact the supply chain, by Bruce Annabel and Mal Scrymgeour
The 1 October price cuts were a much less bloody affair than many had imagined. The reasons we ended up experiencing relatively less pain appear to be:
- Crestor stayed in the Rosuvastatin WADP calculation, because it hadn’t been in the price disclosure regime for three years or longer. This reduced the price cut significantly although it has now been removed meaning expect a higher 1 April 17 rosuvastatin cut.
- There may be some other molecules in the same boat.
- Some originator drug prices have already been reduced by manufacturers seeking to maintain market share.
But the impact on the supply chain has become critical as many of you will realise after having trading terms adjusted yet again. Another interesting supply chain effect is the price rises granted by Minister Ley on some ridiculously cheap items effective 1 December 16 because suppliers were incurring losses on these thus threatening supply reliability and raising the spectre of major de-listings. But, if suppliers rebate some of the price increases to pharmacy customers it’s likely the Government would take a dim view and not consider price increases ever again.
In the meantime for pharmacy, greater care must be taken to avoid stock outs which is sometimes out of your control given the recent supply issues with, for example, cephalexin.
Supply chain impact
Most men have experienced the sting of a fragrance or after shave applied to a newly shaven face. In terms of price cuts, the sting this time was applied by both wholesalers and generic suppliers. The cuts include another wholesaler pharmacy trading terms clawback of another 0.6% taking average discounts down to around 0.8%.
Being publicly listed companies, and in order to maintain their business models, the wholesalers again had no alternative but to curtail your trading terms enough to cover the lost bottom line profit. The question for both sectors, wholesaler and pharmacy, is what happens after this avenue is exhausted late next year? It’s not far away. A great deal hangs on the CSO scheme and the outcome of the Dr King chaired pharmacy review recommendations.
Now the generic suppliers
Due to the intense, and at times irrational, generic sector competition, the sting of price cuts had been buffered for pharmacy by the generic suppliers, well, until now.
With blood on their collars, there seems little doubt the generic suppliers have entered the same reality wholesalers did back in 2011/12. As you know they cut to stem the bleeding having no choice but to tighten up operating overheads, review services, pull back pharmacy trade discounts, seek non PBS reliant income streams and ask the Government to increase certain prices as mentioned above.
For the generic sector this very same reality is manifesting now with the top seven issues being:
- Almost 100 PBS medicines have an ex-manufacturer price of less than $2 with circa 200 between $2 and $5.
- Below $2 medicines incur losses as the cost of goods and cost of doing business aren’t covered. And it costs almost $90,000 to get market authorisation for a generic medicine in Australia plus annual registration fees per item regardless of profitability.
- Therefore, not surprisingly there have been product de-listings which may continue at an increasing rate. Amoxycillin is a case in point – if major suppliers exit the market or opt for the private market where does that leave patients and government?
- On a positive note as mentioned the government granted increases to the approved ex-manufacturer price for some ultra-cheap drugs in response to the spectre of de-listing. That will help maintain reliable supply for these important items provided generic suppliers don’t rebate the increase to pharmacies and pharmacy group head offices.
- Head office contributions, direct pharmacy net into store (NIS) discounts, bonus stock, marketing support and other services are all taken into price disclosure WADP calculations. In fact, bonus stock and head office contributions now represent a far greater cost to suppliers than the NIS pharmacy discounts.
- While the 1 October cuts definitely impacted NIS discounts, generic companies have had little choice other than to curtail some group head office contributions and rebates. Some groups in turn are being forced to seek savings, alternate income sources and efficiencies at head office and at pharmacy level.
- To minimise discount clawbacks generic companies are tightening up expenses, cutting staff, with one major supplier recently terminating thirteen employees, and adding other income sources such as professional services and non PBS product ranges.
The message for pharmacy is the supply industry is this. The low cost generic sector will have no alternative but to clip your trading terms including some group head office rebates and keep on doing so. In short, we’re still shaving faces with a rusty knife. Even a little cut will really hurt.