Huge battle brewing over the future direction of pharmacies in Australia
Wesfarmers, Sigma and Woolworths have all made bids for Australian Pharmaceutical Industries which operates Priceline.
During the COVID-19 pandemic, a trip to the pharmacy became one of the few shopping highlights that was allowed during the many lockdowns.
However, it wasn’t just shoppers who were taking notice of the central role pharmacies play in retailing but also the big companies that own massive chunks of our existing retail chains.
Wesfarmers (ASX: WES) – which sold off most of Coles but still owns the Bunnings, Kmart, Target and Officeworks chains – showed its interest in the sector with a July takeover bid for Priceline operator Australian Pharmaceutical Industries (ASX: API).
Since then, the 470 Priceline stores have also attracted bids from Amcal and Guardian chemist chain owner and drug wholesaler Sigma (ASX: SIG) and most recently from supermarket giant Woolworths (ASX: WOW).
Earlier this month, Woolworths lobbed an $872 million bid and is doing due diligence after the API board said the offer represented “compelling value” for shareholders and was superior to the previously recommended Wesfarmers’ scheme of arrangement.
A hot trio of bidders flashing cash
That is a fairly hot trio of bidders including Australia’s two biggest retailers and an existing pharmacy player so it is fairly clear that there is more afoot than merely wanting to own outlets that can trade during lockdowns.
The entire health and wellness area – the vitamins, cosmetics and aisles full of medical paraphernalia you helpfully need to peruse while you are waiting for a prescription to be filled – is one very hot category that the big retailers want to get more exposure to.
Both Coles and Woolworths have previously shown interest in opening pharmacies in their supermarkets – something that would allow them to greatly expand their medicinal, health and wellness offerings – but this time Woolworths has said it is not interested in doing that and is just interested in growing its exposure to the health and wellness sector and will support the current community pharmacy model.
There have been rumblings from within the pharmacy sector about why a retailer that until recently ran poker machines and sold alcohol and tobacco would feel that it was qualified to enter the business of supplying health advice but that is really a bit of a distraction.
After all, those colourful jelly beans and a multitude of other hokey and unproven over the counter remedies that come out of pharmacies are hardly the latest word on wellness or healthy living.
Locally owned versus less regulated chains
What this fight is really about is keeping Australia’s pharmacies running along a locally owned model which is highly regulated – unlike offshore markets which have seen pharmacies become owned and run by retail chains.
Australian pharmacies are instead owned by thousands of registered pharmacists and can’t even move to new locations without approval.
A new pharmacy can’t open up within 1.5 kilometres of another outlet and new owners must be approved, although many pharmacies have joined buying chains to centralise marketing and range.
Pharmacists are powerful lobby
According to the Pharmacy Guild of Australia and many pharmacy owners, such protections are designed to ensure the quality of patient care – something which shows up in consumer surveys which put pharmacists right near the top of the most trusted Australians.
However, the power of the pharmacy lobby is extreme – it is the reason why you need to go back to the pharmacy every month to collect many prescriptions – something the Federal Government found out when it tried to cut costs by planning for larger packet sizes.
In the end, Health Minister Greg Hunt was forced to back down on his plan to issue two-month prescriptions to deliver cheaper medicines to Australians by doubling the number of tablets that can be dispensed in a single trip to the pharmacy.
That would have halved dispensing fees for pharmacists for a wide range of drugs and led to a quick and very successful lobbying campaign by the Pharmacy Guild.
Current rules keeping drug costs high
Even the Australian Medical Association has argued that the current pharmacy rules are anti-competitive and should be relaxed, pointing to lower prescription prices offshore.
There are already plenty of pressures in the current pharmacy model, with the current loosely aligned chain brands increasingly competing with budget offerings from Chemist Warehouse.
Adding a retail giant into the mix is sure to open up even more pressures, some of which might be inevitable over time as the market for health and wellness products continues to grow and the current model of giving advice and warnings while dispensing medicines comes under more strain.
Either way it goes, this takeover battle promises to be one for the record books as two powerful and influential bodies – the big retailers and the Pharmacy Guild – are inevitably drawn into a high stakes battle for future control of how pharmacies operate.