An Analysis of the Pressure Points on Dispensary Profit Margins THE BIG SQUEEZE An Analysis of the Pressure Points on Dispensary Profit Margins NORMAN.

THE BIG SQUEEZE

An Analysis of the Pressure An Analysis of the Pressure Points on Dispensary Profit Points on Dispensary Profit

MarginsMargins

NORMAN THURECHT

[email protected] 3222 8316

THE BIG SQUEEZE• SOURCES OF PROFIT

• WHAT HAS BEEN HAPPENING?

• 4th AGREEMENT & REMUNERATION CHANGES

• GENERICS – CLAWBACK

• COMMUNITY SERVICE OBLIGATION

• PROPOSED CHANGES TO GENERICS

• CATEGORY WINNERS & LOSERS

• TAKING ADVANTAGE – S2 & S3 COUGH & COLD ALLERGY

• COMPETITIVE LANDSCAPE

• SUMMARY

SOURCES OF PROFIT Pharmacy average sales 2004/05 $ Prop’n

Total Sales 3,067,438

• Dispense Sales 2,019,144 65.8% • Retail Sales(inc S2/3) 1,048,293 34.2%

• Retail Sales(ex S2/3) 769,154 25.1% • Sales S2/3 279,139 9.1%

(SOURCE: JR PHARMACY SERVICES)

Gross & NET Profit Sources 2004/05

GP $ Prop’n Margins

GP$ (inc discs) – Disp 600,887 (61%) 29.8% Retail (total) 378,538 (39%) 36.1%

S2/3 only 128,403 (13%) 46.0%

Net Profit Sources (EBIT) $$ Dispense $243,272 +100% Retail (incl. S2/3) zero 0%

Proportion discs & generics/EBIT 50%+ 8 mths Feb ‘06

(SOURCE: JR PHARMACY SERVICES)

SOURCES OF PROFIT

What has been happening?• Increase Patient Contrib.

12/04 to 1/06 increased 25%Currently $29.50 – more scripts now out of PBSWarehouses discounting

• Increased Petrol Prices

• Interest rate rises

• 20 Day Safety Net Rule

20 Day Rule• The new Safety Net 20 day rule means that

for certain PBS medicines a repeat supply of the same medicine within 20 days will fall outside the Safety Net.

• Meaning: the cost will not count towards the Safety Net

threshold if the Safety Net threshold has been reached, the

charge will be the usual PBS contribution – not the reduced Safety Net amount.

CUSTOMERS SPENDING PATTERNS CHANGING

PBS Pescription Volume Qtrly

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Dec 03Qtr

Mar 04Qtr

June 04Qtr

Sept 04Qtr

Dec 04Qtr

Mar 05Qtr

June 05Qtr

Sept 05Qtr

Dec 05Qtr

Mar 06Qtr

June 06Qtr

Quarter

% C

hange to p

rior

Qtr

4th Agreement• Total funding $11.1 billion• Reduced wholesaler margin to 7% +$70 for

items >$1,000• Fee increases on 1/12/05 and 1/7/06• 10% pharmacy mark up unchanged but $40

flat payment for items > $1,000• CSO funding pool of $150m (pharmacy

may not get all of it)

12.5% Clawback

• Agreement only

• Clawbacks on 1/8/05, 1/12/05, 1/4/06 & 1/8/06

• Each time the Govt saves ($220mill @ 1/8/06)

• Brand pharma loses

• Generic loses too – but…..volume

Generics & 12.5% ReductionBranded Item Pre 1/8 Now Change

Pravacol 40 61.84 54.11 (7.73) (12.5)%

+ Mark-up 6.18 5.41 (0.77)

+ Fee 5.15 5.15 -----

Sale Value 73.17 64.67 (8.50) (11.6)%

GP $

Fee + Mark-up 11.33 10.56

W/Saler disc. (5%) 3.09 2.71

GP $ 14.43 13.27 (1.16) (8.0)%

GP % 19.72% 20.51%

Generics & 12.5% ReductionGeneric Item Pre 1/8 Now Change

Lipostat 40 40.98 35.86 (5.12) (12.5)%+ Mark-up 4.10 3.59 (0.51)+ Fee 5.15 5.15 ---

Sale Value 50.23 44.59 (5.63) (11.2)%

GP $Fee + Mark-up 9.25 8.74Generic Incentive (30%) 12.29 10.76GP $ 21.54 19.49 (2.05) (9.5)%

GP % 42.88% 43.71%

Generics & 12.5% ReductionIn this example, pharmacy GP$/profit increases 47% by switching:

Branded Item

Pharmacy GP$ $13.27

Pharmacy GP% 20.51%

Generic Item

Pharmacy GP$ $19.49

Pharmacy GP% 43.71%

Generics vs Brand Summary

• Consequences of Clawback:

• Government saves• Wholesalers losing more than Pharmacy

Switching CSO New w’salers

CSO

Lipitor 20mg – New Cost to PharmacyPre July Post July

Mfter Cost $44.95 $44.95W’sler M/up 11.11% 7.52%PTP $49.96 $48.33W’sler Disc 5.5% 2.3%NIS $47.21 $47.21Loyalty Disc 0% 2.5%Net Cost $47.21 $46.03

CSOLipitor 20mg – New GP% and GP$ Pharmacy

Pre July Post JulyPTP $49.96 $48.33Mark-up (10%) 5.00 4.83Disp Fee 4.94 5.15Total $ Dispensed $59.90 $58.31

GP $12.69 21.2% $12.28 21.06%Difference $0.62 (before 21c increase)

$0.41 (including increase)

CSODiscount needed to remain the same?

Pre July Post July

PTP $49.96 $48.33W’sler Disc 5.5% 2.3%NIS $47.21 $47.21Loyalty Disc 0% 3.36%Net Cost $47.21 $45.62 PTP $49.96 $48.33Mark-up (10%) 5.00 4.83Disp Fee 4.94 5.15Total $ Dispensed $59.90 $58.31

GP $12.69 21.2% $12.69 21.76%

• Wholesaler loyalty = highest discount

• Pharmacy has to give it!

CSO

Proposed Changes to Generics

• Australian Newspaper 31/8 – Draconian changes will not occur

• Possibilities:

increasing the clawback;

reducing the PTP for generics (ie: reduces your

discount); and/or

making it mandatory for Pharmacists to substitute

generic for branded drug

Proposed Changes to Generics

Increase clawback to 17.5%In this example, pharmacy GP$/profit still increases by switching, but…..

Branded Item (Previously 12.5%)

Pharmacy GP$ $12.80 $13.27Pharmacy GP% 20.90% 20.51%

Generic Item

Pharmacy GP$ $18.67 $19.49Pharmacy GP% 44.10% 43.71%

What are the Issues?Can not assume PBS volumes will growPBS GP$ will continue to be clippedGenerics!!!Services and disc decrease if not loyalMust obtain efficiencies from the

dispensing processMust embrace total store healthcare

outcomes for customers

Economically irrational regulations often give rise to

economically irrational

business strategies

(McKinsey – special collection 11 may (McKinsey – special collection 11 may 2006)2006)

CATEGORIES - IMPROVE

“ANOTHER MISTAKE THAT BOOTS

MANAGEMENT MADE MANY YEARS AGO WAS

DROPPING ITS BABY PRODUCTS, WHICH RESULTED

IN THE LOSS OF THE DISPENSING BUSINESS”

(Richard Baker – CEO Boots NAM News 16/3/06)

CONSIDER SOLUTIONS

PAIN ASTHMA ALLERGY CHILDREN AGED POWER CATEGORIES POWER OF BRANDS

COUGH & COLD

Average – 46% gp 31 linear mtrs 15% retail sales

Better/Best – 48% to 55% gp 50+ linear mtrs 19% retail sales

TAKE ADVANTAGE – S2/3TAKE ADVANTAGE – S2/3

CUSTOMERS…..WILL DETERMINE YOUR FUTURE

“Do yourselves a favour – forget the product and embrace the outcome. Then you’ll make enough sales at enough margin.”

(Hilary Kahn – Retail Pharmacy July 2006)

COMPETITION2005 KPIs – Pharmacy, Warehouse, Supermarket

P’cy W/hse S/mkt

Area m2 211m2 700m2 1,834m2

Sales/m2 $14,527 $10,000 $14,043

Retail sales/m2 $5,728 $6,015 $14,043 GP % - Disp - inc discs 29.8% 21% n/a

- Retail - inc s2/3 36.1% 28% 23.7%

- Total 31.9% 24% 23.7% Wages/Sales (inc owner) 13.2% 9% 10%

Wages/GP $$ 41.3% 37% 42%

Rent/sales 3.9% 3% 3%

Total O/H/Sales 24.0% 17% 19%/16%

Source – JR Pharmacy Services Client Averages

P’cy W/hse S/mkt

EBIT/sales 7.9% 7% 4.6%/7.6%

Stock Turn - Retail 3.7 5 15

- Total 13.2 7.5 15

Retail GMROII $2.09 $1.89 $4.67

COMPETITION2005 KPIs – Pharmacy, Warehouse, Supermarket

Source – JR Pharmacy Services Client Averages

C o p y r ig h t © 2 0 0 5 A C N ie lse n

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2005

Pressure Point Solution

4th Agreement Remuneration Leverage from Dispensary

(HMR, Retail etc)

Softening PBS Volume Leverage from Dispensary

(look for efficiencies)

Generic Clawbacks Substitute where possible(caution consumer

reaction)

CSO Focus on loyalty with W’saler

Message

THE BIG SQUEEZE

An Analysis of the Pressure An Analysis of the Pressure Points on Dispensary Profit Points on Dispensary Profit

MarginsMargins

NORMAN THURECHT

[email protected] 3222 8316