An article on bank lending behaviour for pharmacy businesses over the weekend may have implied that the Government was currently considering deregulating pharmacy, but its warning to pharmacy remains valid, says an industry expert.
The article in the Weekend Australian incorrectly implied that the Pharmacy Remuneration and Regulation Review is empowered to review and make changes to pharmacy ownership.
But while pharmacy ownership is not currently under consideration, Bruce Annabel warns that the article’s premise is entirely valid: pharmacy is no longer seen as the safe bet it once was by lenders.
“Banks do see pharmacy as not as secure as it used to be – they have tightened up their practices and they’re also taking a bit of their own view on pharmacy valuations,” the long-time industry commentator told the AJP.
“Pharmacy ownership regulations being pharmacist-only or pharmacist corporation only doesn’t really make pharmacy immune from competition.
“We’ve seen significant and sophisticated competition from within the sector, mainly Chemist Warehouse; and from external to the sector, mainly online and the supermarkets in particular.
“The other thing, of course, which is changing banks’ view of the bulletproof nature of community pharmacy is price disclosure, which hasn’t finished yet – it’s still got another 18 months, perhaps two years to run before the majority of it is done, and that has had an effect on profitability and risk.”
The issues which do come under the purview of the King review – which has now been delayed as the Government has entered “caretaker mode” prior to the July 2 election – are still of significance to pharmacy risk, Annabel says.
“First is remuneration for PBS dispensing. I think that’s a significant risk because pharmacies’ bottom line relies so much on that remuneration; and if we go by his comments at APP about the split between supply and advice, it’s a significant risk because pharmacy would need to look more carefully at what would be required to receive a fee for advice and compare that with what they do today.
“The location rules could have an impact, but one wonders how much more of an impact it could have than the real changes had back in October 2011.”
Annabel says that since October 2011 around four or five hundred more pharmacies have opened around Australia, taking the total to about 5500.
“If we look at Stephen King’s comments at APP, there were words to the effect that he thought the location rules were pretty good, but there could be some changes, for example to the shopping centre rules or the medical centre rules.
“However, wholesale changes to the location rules could have a significant effect on the profitability and competitiveness of traditional community pharmacies with more sophisticated operators coming in, setting up shop next door and competing aggressively against them.”
But it’s important to take a step back from the long-awaited King review and consider the wider picture when discussing how lenders could change their attitude to pharmacy, Annabel told the AJP.
“I look at the Sixth Agreement and the reviews, I look at the Harper Competition Review – which was formally adopted by the Turnbull Government in November 2015 – and I think about what’s going on in New Zealand, which is a proposal for ownership deregulation, and I do wonder whether the risk level of community pharmacy has significantly increased,” Annabel says.
The impact of price disclosure on dispensary and overall pharmacy profitability has also increased risk, he says.
“There has been very little meaningful innovation in the traditional community pharmacy model, and there still seems to be a resistance to change in order to transform the business and competitive model and the practice model – indeed, to take note of these enhanced risks and actually respond in a robust way to them.
“Banks are in a position where they need to take account of these heightened risks and perhaps they already are, through the reactions we’re seeing.”
He says a recent IbisWorld prediction that pharmacy was about to enter a “terror zone” in its long term business cycle was likely to be accurate.
“That’s exactly where they could finish up. If they do or not is up to them, and up to individual pharmacists and pharmacies.
“Pharmacy has a little over four years to do something. And in the meantime, if pharmacists do have debt, it would be wise of them to look at how they can pay that debt down during the next four years, in order to mitigate their risk, if they are able.”