On 1 April a number of large volume drugs managed to avoid a sizable price cut, however the pharmaceutical supply chain has already suffered serious damage says Bruce Annabel.

The principle reason for the reduced level of medicines experiencing price cuts was that certain drugs were excluded this time thanks to Government raising the WADP v current ex manufacturer threshold from 10% to 30% above which a cut occurs. But, the drug must first process through seven price disclosure cycles before the 30% threshold applies.

Below is a small table showing some examples of 1 drugs that were potentially subject to a 1 April 18 price cut:

 

Drug

WADP v existing ex- man price

No > 7 cycles

Yes < 7 cycles

Yes > 30%

Rosuvastatin

23%

No price cut

  

Esomeprazole

36%

 

Price cut

Price cut

Risedronic acid

10.1%

No price cut

  

Valsartan

20%

 

Price cut

 

Because Rosuvastatin (Crestor) and Risedronic acid (Actonel) have both endured seven price disclosure cycles and the variation compared with the 31 March 2018 ex manufacturer price was less than 30%, their prices weren’t cut. However, Esomeprazole (Nexium) failed both new tests and while Valsartan (Diovan) cut was less than 30% it hadn’t been through seven cycles yet, meaning both drugs were cut and pharmacy discounts with it.

These new rules became law on 21 February and thankfully minimised the overall impact of the 1 April price cuts for pharmacy, wholesalers and the relevant manufacturers. Apart from the positive profit effect throughout the supply chain the policy helps maintain continuity of supply. And that was the very point that the GBMA argued in prosecuting the need for a price cut ‘moratorium’.

The bottom line is after the 1 October 17 and 1 April ’18 price cuts are deducted from the 1 July 17 53c per script AHI and dispense fee income boost pharmacy dispensing profitability should benefit on an annualised basis by about 35c/Rx, slightly higher than inflation. That is in stark contrast to the price cut hits pharmacy and all supply chain participants endured in 2016/17 which damaged bottom lines and ways of doing business particularly for suppliers and wholesalers.   

By now the majority of supplier discounts have been stripped out leaving pharmacy mostly dependent on fee income (AHI, dispense, Premium Free Incentive, safety net allowable fees and services) which is certainly enough to run a profitable dispensary and professional services operation.

But, while pharmacy is ok, due principally to the Guild’s political effectiveness encouraging Government to raise fees and services meaning a lot of the discounts removed have been replaced by fees that enjoy an annual CPI and risk share uplift. But, in the meantime a trail of wreckage has been left further up the supply chain that you might not be aware of.

This has been directly and indirectly caused by patent expiries combined with the series of so called PBS ‘reforms’ plus listing ‘uncertainties’ wrought by successive Governments of both persuasions seeking to contain spending. One could reasonably say that based on actions the PBS is in fact capped even though you won’t find a Government policy saying so.

At each juncture pharmacy has been largely compensated while all other participants have been hit hard resulting in forced fundamental changes.

Therefore, originator manufacturers, generic suppliers, generic manufacturers and the wholesalers are operating incredibly lean operations that would shock any pharmacy owner.

This is typified by:

  • Cutting overheads
  • Reducing staff numbers
  • Push back on overseas manufacturers
  • Increasing reliance by suppliers on global and international manufacturing networks
  • When API (the base manufacture ingredients) or the finished packaging supply is constrained Australian generic suppliers are competing for allocation with more attractive markets where pricing and margins deliver more accretive returns to the parent company
  • Reduced stock holdings
  • Adjusting ranges carried
  • Pulling back on services
  • Cutting pharmacy trading terms aka discounts.

Well, damage to the supply chain has been done with the participants having just about reached a crisis point impacting as you all know drug supply reliability. It looks like it will only worsen and has become a significant problem for pharmacy principally in relation to generics, to a lesser extent private label and a minor number of originators.

While that is a direct result of the lean model run by the rest of the supply chain pharmacy has unwittingly contributed to it through understandably doing their best to reduce net into store prices. By pushing suppliers for bigger discounts to offset a round of price cuts that in turn leads to another price cut which results in pharmacy pushing back again on suppliers and so it goes on until there’s virtually nothing left. Unfortunately the rise of the large banner groups possessing serious bargaining power combined with fierce generic supplier competition has only exacerbated the problem as they seek to finance their management offices and help their members.  

Next week I will discuss impacts on various supply chain segments in greater detail. 

Bruce Annabel is a pharmacy business consultant and Adjunct Professor of Pharmacy Management, QUT