Falling PBS script prices force pharmacies to boost retail revenue


Pharmacy shopper

PBS reform is forcing pharmacy operators to boost their retail revenue, a report from IBISWorld, Pharmacies in 2016-7, shows.

The report, which warns of troubled times ahead for pharmacy, says the industry is expected to generate revenue of $15.8 billion in 2016-17 and post sluggish annualised growth of 0.3% in the five years through 2016-17.

While the pharmacy sector is expected to continue growing, it will continue to face challenging conditions over the next five years, the report says.

“The industry’s competitive landscape will become increasingly polarised between small, high-service pharmacies that offer allied preventative and primary health care services, and large, high-volume, lower margin discount pharmacies that compete on the basis of price,” the report predicts.

“Over the past five years, there have been several favourable conditions driving the underlying demand for pharmaceutical and medicinal products, including an ageing population and rising health consciousness,” it says.

“However, the Australian Pharmacies industry has not fared especially well over the past five years. In particular, there have been adverse effects associated with ongoing Pharmaceutical Benefit Scheme (PBS) regulatory reforms, which have reduced the prices of prescription medicines.”

Commenting on the industry’s performance, IBISWorld Senior Industry Analyst Arna Richardson says, “IBISWorld anticipates the Australian pharmacies industry to grow by an annualised 0.8% in the five years through 2021-22 to reach revenue of over $16 billion.

“Price deflation has occurred due to ongoing PBS reforms as PBS medicine costs have been progressively cut, including prices for a growing number of commonly used drugs,” Richardson says.

Simplified price disclosure arrangements set to come into effect from 1 October 2016 are expected to lower the price of generic drugs further, following originator brand drug versions being removed from weighted average disclosed price calculations, causing fallout for pharmacy, the report warns.

“For example, the four sets of price disclosure reductions between 1 December 2013 and 1 October 2014 have resulted in $1 billion in price cuts,” the report says.

“In 2014-15, the average dispensed price per PBS prescription fell by 4%, with further falls expected in 2016-17. The industry is now contending with the effects of accelerated price cuts, with the first round of simplified price disclosure (SPD) occurring on 1 October 2014.

“This has resulted in price cuts of up to 62% for 300 generic medicines, including two of the highest cost medicines on the PBS.

“In addition, both internal and external competition have pressured the industry. In response, industry operators have introduced new business models, which have included a growing focus on retail and non-PBS revenue streams.”

As a result of ongoing PBS reforms causing price deflation, IBISWorld expects industry operators to focus on growing non-PBS and other retail revenue as they seek to reduce reliance on prescription revenue.

“Alternative revenue sources include scheduled non-prescription medicines, cosmetics, beauty products, baby products, body- and hair-care products, suncare products and other general health items.

“Pharmacies will also focus on preventative and primary health care programs as they seek to cement their role in community primary health care.”

“While an ageing population and increasingly health-conscious consumers provide substantial demand for pharmaceutical and medicinal products, this is unlikely to result in robust revenue growth,” said Ms Richardson.

“Over the past decade, traditional community pharmacies have undergone significant changes. Intensifying retail competition from new internal and external operators, such as discount pharmacies and supermarkets, have altered the industry’s operating landscape, particularly as a growing number of operators rely on promotional discounting.

“Consumers have been increasingly purchasing pharmacy products, including over-the-counter products, from supermarkets. For example, many supermarkets are now stocking a range of widely used non-scheduled medicines. This has reduced demand for traditional pharmacies,” Richardson says.

IBISWorld expects external competitive pressure from supermarkets to continue in 2016-17, as consumers’ desire for convenience drives sales growth for general medicines from supermarkets.

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1 Comment

  1. Bruce ANNABEL
    12/07/2016

    IBIS report and comments are generally correct regarding price cuts and pitched in the right direction. However, as usual their estimate of industry turnover is well below actual because I suspect they don’t include private and safety net < co-pay scripts. And Most community pharmacies future will be firmly rooted in non script health departments particularly s3/2 medicines, evidence based complementary lines including practitioner products, wound care, services income (6CPA and others), therapeutic skin and hair, eye/ear care, nutrition/wellness/diet and so on. The market, alternate channels and sophisticated competitors dominate the suggestions particularly beauty…

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