Battle royal for critical mass in pharmacy sector

Pharmacies: Expansion by pharmacy groups has driven rents in the sector to pre-deregulation highs. However, it's the wholesalers which are emerging as the industry's real powerbrokers, writes Gretchen Friemann

Leasehold interests and rental values in the pharmacy industry are hitting pre-deregulation highs as the rush to build up a critical mass in the market sparks a property bidding war between rival chemist chains and healthcare distributors.

In a post-deregulation market indigenous groups are seizing the opportunity to buy out smaller chemist chains and outlets in order to compete against the large multinationals, which became the leading pharmacy retailers in the state after industry restrictions were swept away in January 2002.

The intense demand for high street chemists or pharmacies located in prime retail areas has resulted in long established businesses doubling in value over the last couple of years and industry sources believe further consolidation is inevitable as smaller operators are squeezed out of the market under increasing margin pressure.

This week, two of the largest Irish-owned groups unveiled bullish expansion policies with Hickey Pharmacy claiming it will more than double in size over the next five years by buying up to 20 outlets throughout the country.

Last year, Kerry-born pharmacist, Mr Paddy Hickey, splashed out a reported €25 million on the O'Connell group's seven Dublin outlets and another €4 million on three provincial pharmacies owned by Mr Phillip Dillon, bringing his company's total number of outlets to 19.

The Sam McCauley group, which operates 15 stores, also revealed it will open four new stores by the end of the year.

The Carlow-based company claims to be the third largest pharmacy group in the state based on turnover alone and the addition of four new stores this year means its network will be on an even footing with the rival Hickey chain.

One of the new outlets will be located in the O'Callaghan-developed Mahon Point shopping centre in Cork, where Tesco and Debenhams will be the anchor tenants. Annual rent on the 279 sq m (3,000 sq ft) outlet is €262,000 per annum. A further two chemists have been bought in the Dublin area while the fourth outlet is still in the final stages of negotiation and the company declined to reveal its location.

According to the group's joint managing director, Mr Patrick McCormack, seven more acquisitions are in the pipeline for next year, which he claims will result in the company more than doubling its turnover to above €100 million.

This year the group is on target to generate €48 million in revenue, up €5 million from last year's results. But despite the talk of expansion, primarily aimed at advertising each company's buying power to the market, it's the wholesalers who are emerging as the industry's real powerbrokers.

Healthcare distributor Uniphar has amassed 62 outlets through its Independent Pharmacy Ownership Scheme (IPOS) over the last two years, which outstrips in size both the Unicare and Boots networks.

While Unicare (owned by the Stuttgart-based Celesio group, formerly trading as Gehe) and Boots generate a larger turnover than IPOS due to the size and prime location of their stores, industry sources claim it's Uniphar's growing influence among independent pharmacists that is shaping the market and providing the most effective bulwark to the multi-national's growth objectives. The IPOS scheme, established just prior to the industry's deregulation, bills itself as a facilitator to the community pharmacy sector, an ethos which resonates loudly with many practitioners who worry the open market will concentrate too much power in the hands of the multinationals and lead to the "McDonaldisation" of the industry.

By buying up outlets and then offering young pharmacists the business at a fraction of the market value through a loan scheme which must be paid off over a 10 to 12-year period, Uniphar not only wards off competition from the multinationals eager to expand their networks, it also secures its lucrative wholesale market.

During the term of the loan Uniphar dictates much of the operational management of the business, although it's understood pharmacists are not legally bound to source products from the healthcare distributor.

With hundreds of pharmacists now operating within the IPOS scheme, Uniphar has become a fiercer competitor to the growing Irish chains than the multinationals. One source within a large indigenous pharmacy group identified IPOS as the "biggest threat" to its expansion plans and said the wholesaler was a rival bidder on most of the properties his company tendered for.

The intense competition for well-located chemists is sending leasehold interests sky high. He said: "The leaseholds we're bidding for in some cases are reaching pre-deregulation highs and are substantially above what the smaller operators can afford."

Now that deregulation allows a pharmacy to open anywhere as long as it employs a pharmacist, making the Republic the most open market in Europe, multinationals, local chemist chains and wholesalers are rushing to cash in on an industry which generates significant margins on both its medical and non-prescription goods.

Uniphar is not the only distributor to operate its own buying arm. Cahill May Roberts, the wholesaler owned by Celesio, also runs a similar programme and analysts claim its recent lack-lustre results reflect the reluctance of independent pharmacies to source supplies from a company that is a direct competitor on the high street.

Celesio's listed rival, United Drug, maintains its Catalyst scheme - aimed at helping pharmacists to own or grow their business without imposing ownership rights or loyalty contracts - is intended to foster an independent pharmacy sector.

The company's general manager in Leinster, Ms Rosemary McCrath, said: "We made a strategical decision to not become involved in owning or running pharmacies. We wanted to support independent pharmacists and help young ones realise their dreams of owning their own business. We do not want to be in competition with our customers."

However industry competitors claim the company is part-funding the expansion of some of its largest customers.

Mr Paddy Hickey employs United Drug as his wholesaler and also sits on the wholesale group's advisory board.

When asked whether United Drug had contributed money to the Hickey group expansion, Ms McGrath said she would not comment on individual cases but said: "Through our Catalyst scheme (which is a debt-based scheme offered at a fixed rate) our strategy is to ensure that the same level of support is given to a pharmacist whether he or she is buying one pharmacy or a number of pharmacies.

"The vast majority of our customers who have availed of this scheme are singly owned individual pharmacists with 100 per cent control and ownership of their pharmacy from day one."