Pharmacies call for the doctor

REBECCA URBAN
MAY 08, 2014
THE AUSTRALIAN
PHARMACY insolvencies have been tipped to rise to unprecedented levels from next year, as the nation’s largest drugs wholesaler slammed a high-level review into government spending for perpetuating misconceptions about the cost of the Pharmaceutical Benefits Scheme.
With industry conditions set to toughen following the introduction of accelerated price cuts for medicines in October, stockbroker Taylor Collison has estimated that about 300 pharmacies could collapse this year and next — more than 5 per cent of the country’s 5300 community phar­macies.
Last year, about 100 pharmacies were placed into receivership — including the NSW-based Harrisons Pharmacy chain — a tally higher than the previous 10 years combined.
The forecast, which is based on analysis of pharmacy fixed costs as well as discussions with operators, has been validated by the Pharmacy Guild of Australia, which has flagged similar concerns about the financial health of the sector.
It also follows last week’s posting of a $115 million half-year loss by major wholesaler Australian Pharmaceutical Industries, which was largely the result of writedowns of bad debts. The publicly listed group owns Priceline and Priceline Pharmacy, and is also behind the Soul Pattinson and Pharmacist Advice banner groups.
The worrying outlook emerged as Sigma Pharmaceuticals chairman Brian Jamieson yesterday took the National Commission of Audit to task over its recommendations for the sector, which were flagged in its controversial report last week.
Speaking at Sigma’s annual meeting in Melbourne, Mr Jamie­son said it was disappointing that the commission, chaired by Tony Shepherd, did not consult broadly with the industry ­before making its rec­om­men­dations, which have yet to be adopted by the federal government. He said the recommendations appeared to be driven by key assumptions that the PBS was growing at a rate that required “additional corrective measures”.
“This appears to contradict the government’s own 2013-14 mid-year economic and fiscal outlook, which listed the PBS as the largest single downward revision across the entire commonwealth budget,” Mr Jamieson said.
“In fact, according to government figures, the PBS budgeted forward estimates spend out to 2017 has declined by $8.9 billion since the 2011-12 budget was first cast.
“The fact that this has been achieved during a period of pop­ulation growth and with ageing population does not point to a PBS that is spiralling out of ­control.”
The pharmacy industry has argued that it has already been subject to significant funding cuts through various government reforms, particularly the price disclosure regime, which was introduced in 2008 to drive down the price the government reimbursed pharmacists for dispensing medicines once they came off patent and typically fell drastically in price.
While advocates claim that price disclosure leads to a fairer system, pharmacists are facing a significant squeeze to their profit margins as a result, with the process set to accelerate from October.
The guild has estimated that pharmacy gross profits will fall by an average $90,000 in 2014-15, while a recent survey of its members suggested nearly 9000 pharmacy jobs could be slashed over the coming 12 months — more than 10 per cent of the industry’s staff.
Pharmacy Guild national president George Tambassis told The Australian that claims of rising insolvencies from next year were backed up by the group’s own internal modelling.
He said discussions with the federal government, including an appeal for compensation for the October acceleration, which had been implemented outside the official Community Pharmacy Agreement, had so far been unsuccessful.
Healthcare analysts have also sounded warnings about the potential for further changes to the PBS from next week’s federal budget, and the flow-on effects for companies such as API and Sigma.
Taylor Collison analyst Michael Croser, a former pharmacist, believes accelerated price disclosure, the passing patent cliff, increasing competition and higher rents for pharmacies tenanted to shopping centres had created a perfect storm for the pharmacy industry.
“Highly leveraged pharmacies paying greater than 10 per cent rents will need to revert to previous store footprints, be recapitalised or ultimately enter receivership,” he said in a recent report to clients.
The analyst believes that API, in particular, is exposed in the event of increased insolvencies, pointing to its higher receivables exposure, including an Amex facility it has set up to allow pharmacies to pay their bills on time.
Last month the company was forced into a trading halt for several days before flagging $131m in impairment charges, of which $52m was related to long-term loans to pharmacy customers. Management, however, remains hopeful of recovering many of the loans.
API boss Stephen Roche was not available yesterday but a spokesman for the company said he believed the 300 estimate was “overinflated”.
“API doesn’t see any material difference in the profile of its customers and is confident that its credit risk is no different to other wholesalers,” the spokesman said.
“As per the half-year commentary, API doesn’t foresee any other writedowns.”
Sigma managing director Mark Hooper said although PBS changes had made the environment difficult for pharmacies, he also believed the risks to the sector were being “overplayed”.
Both major wholesalers have so far offset the impacts of PBS cuts to their own businesses by clawing back previously generous trading terms with customers.
However, analysts have suggested that their ability to do that in future will be limited.
“Given the cumulative impact of two years of cuts and accelerated price disclosure, we expect it will become incrementally more difficult to push back on customers as … profit margins come under pressure,” UBS analyst Andrew Goodsall recently warned.