Pharmacy Bill could be bitter pill to swallow

Business Opinion:Next month should see the publication of the long-awaited Pharmacy Bill, which, once enacted, will give effect to some long-overdue reforms of the sector.

If reports are correct, it will do away with some of the more anti-competitive practices which restrict the opening of new pharmacies. The current restriction on foreign-trained pharmacists opening and managing pharmacies will be abolished and replaced with fitness to practise regulations.

The extent to which this will produce the same net result - deterring foreigns big and large - remains to be seen.

One must fear the worst, if for no other reason than the election is coming. Another straw in the wind though is the release by the Irish Pharmaceutical Union of a review of the community pharmacy in what smacks of a classic case of getting some retaliation in early.

The document, produced by PwC, is a paean of praise for the sector, which the IPU maintains depends on restrictive measures, such as the bar on foreigners, for its very survival.

The consultants estimate that various jobs done by community pharmacists, such as ensuring people take the right medicine and relieving pressure on GPs, have a value of something in the region of €400 million a year.

While the pharmacists are not directly remunerated for this, the argument would appear be that this offsets the cost - much of which is ultimately borne by the State - of the current set-up which produces very high margins for chemists and protects them from competition.

Part and parcel of this is the complex system by which the profits made on prescription drugs subsidise the distribution of drugs to medical card holders via pharmacy.

It's a complex argument and where you sit on it probably comes down to whether or not you own a pharmacy. However, the IPU deserves credit for publishing the document which also contains a breakdown of the profitability of the community pharmacy sector.

PwC found that the average pharmacy has a turnover of €1.5 million and operates on a gross margin (after cost of sales) of 35 per cent. When the owner's salary and other overheads are deducted, this falls to a net profit margin of 6 per cent, which does not seem all that unreasonable.

It is a rather different picture to that painted by the accounts which retail pharmacists file with the companies office. According to ICC Juniper, the typical margin in the sector is 9.8 per cent, based on an analysis of 3,375 companies in the dispensing chemists sector.

Among the bottom third of chemists it falls to 4.9 per cent, but rises to 16.5 per cent amongst the top third, which ICC Juniper calculate earn a rather tasty 58.5 per cent profit on their capital employed.

It would appear then that the community pharmacists are being somewhat economical with the truth, either to PwC or the companies office, or both.

But we will not concern ourselves with that. What is a more interesting question is what sort of profits are reasonable for a pharmacy business? More pertinently, are they all making the sort of supernormal profits you might expect in the absence of competition?

Finding a reference point for this is not that simple. One obvious benchmark is small retailers. You could argue that these are also community businesses who provide an above-average level of service.

Equally, you could argue that they face the same threat that community pharmacists live in fear of; some large foreign- owned competitor opening up down the road and driving them out of business through aggressive price competition.

ICC Juniper's analysis of 3,266 companies defined as being involved in retail sale in non-specialised stores with food, beverages or tobacco predominating, finds that the medium margin (profits versus sales) is 3.3 per cent and the range is from 0.7 per cent to 6.2 per cent. Those firms in the top third earn an 88.9 per cent return on their capital.

It would be dangerous to draw too many conclusions from this, but we would appear to be on safe ground in concluding that it is inherently more profitable to sell prescription drugs rather than breakfast rolls. The obvious explanation is that you are paying for the expertise of the pharmacist and, one suspects, some of the €400 million worth of TLC that the IPU claims its gives for free every year.

Next question: are we paying too much for this? The answer would appear to be yes, if we look at ICC Juniper's analysis of dispensing chemists in the UK, which one presumes think they are every bit as warm and cuddly as their Irish counter parties.

ICC Juniper's analysis of 2,852 dispensing chemists in the UK found median margins were 5.4 per cent, with the lower third operating on 1.6 per cent and the upper third on 10 per cent.

Two possible explanations suggest themselves. UK pharmacists are expanding into the breakfast roll trade or Irish pharmacists are not as nice as they seem.