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

THE BIG SQUEEZE An Analysis of the Pressure Points on Dispensary Profit Margins. NORMAN THURECHT NThurecht @jr.com.au 07 3222 8 316. THE BIG SQUEEZE. SOURCE S OF PROFIT WHAT HAS BEEN HAPPENING? 4 th AGREEMENT & REMUNERATION CHANGES GENERICS – CLAWBACK COMMUNITY SERVICE OBLIGATION

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

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  1. THE BIG SQUEEZEAn Analysis of the Pressure Points on Dispensary Profit Margins NORMAN THURECHT NThurecht@jr.com.au 07 3222 8316

  2. 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

  3. SOURCES OF PROFIT Pharmacy average sales 2004/05 $Prop’n Total Sales3,067,438 • Dispense Sales 2,019,144 65.8% • Retail Sales(inc S2/3) 1,048,29334.2% • Retail Sales(exS2/3)769,15425.1% • Sales S2/3279,1399.1% (SOURCE: JR PHARMACY SERVICES)

  4. SOURCES OF PROFIT Gross & NET Profit Sources 2004/05 GP $Prop’nMargins GP$(inc discs) – Disp 600,887(61%) 29.8% Retail (total)378,538(39%) 36.1% S2/3 only128,403(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)

  5. What has been happening? • Increase Patient Contrib. • 12/04 to 1/06 increased 25% • Currently $29.50 – more scripts now out of PBS • Warehouses discounting • Increased Petrol Prices • Interest rate rises • 20 Day Safety Net Rule

  6. 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

  7. 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)

  8. 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

  9. Generics & 12.5% Reduction Branded ItemPre 1/8NowChange 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 73.1764.67(8.50)(11.6)% GP $ Fee + Mark-up 11.33 10.56 W/Saler disc. (5%) 3.09 2.71 GP $ 14.4313.27 (1.16)(8.0)% GP % 19.72% 20.51%

  10. Generics & 12.5% Reduction Generic ItemPre 1/8NowChange 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 50.2344.59(5.63)(11.2)% GP $ Fee + Mark-up 9.25 8.74 Generic Incentive (30%) 12.2910.76 GP $ 21.5419.49(2.05)(9.5)% GP % 42.88% 43.71%

  11. Generics & 12.5% Reduction In 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%

  12. Generics vs Brand Summary • Consequences of Clawback: • Government saves • Wholesalers losing more than Pharmacy • Switching • CSO • New w’salers

  13. CSO Lipitor 20mg – New Cost to Pharmacy Pre July Post July Mfter Cost $44.95 $44.95 W’sler M/up 11.11% 7.52% PTP $49.96$48.33 W’sler Disc 5.5% 2.3% NIS $47.21$47.21 Loyalty Disc 0% 2.5% Net Cost $47.21$46.03

  14. CSO Lipitor 20mg – New GP% and GP$ Pharmacy Pre July Post July PTP $49.96 $48.33 Mark-up (10%) 5.00 4.83 Disp Fee 4.945.15 Total $ Dispensed $59.90$58.31 GP $12.69 21.2% $12.28 21.06% Difference $0.62 (before 21c increase) $0.41 (including increase)

  15. CSO Discount needed to remain the same? Pre July Post July PTP $49.96$48.33 W’sler Disc 5.5% 2.3% NIS $47.21$47.21 Loyalty Disc 0% 3.36% Net Cost $47.21$45.62 PTP $49.96 $48.33 Mark-up (10%) 5.00 4.83 Disp Fee 4.945.15 Total $ Dispensed $59.90$58.31 GP $12.69 21.2% $12.69 21.76%

  16. CSO • Wholesaler loyalty = highest discount • Pharmacy has to give it!

  17. 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

  18. 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$13.27 Pharmacy GP% 20.90% 20.51% Generic Item Pharmacy GP$ $18.67$19.49 Pharmacy GP% 44.10% 43.71%

  19. What are the Issues? • Can not assume PBS volumes will grow • PBS GP$ will continue to be clipped • Generics!!! • Services and disc decrease if not loyal • Must obtain efficiencies from the dispensing process • Must embrace total store healthcare outcomes for customers

  20. Economically irrational regulations often give rise to economically irrational business strategies (McKinsey – special collection 11 may 2006)

  21. 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)

  22. TAKE ADVANTAGE – S2/3 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

  23. 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)

  24. COMPETITION 2005KPIs – Pharmacy, Warehouse, Supermarket P’cy W/hseS/mkt Area m2 211m2700m2 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/sales3.9%3%3% Total O/H/Sales 24.0% 17% 19%/16% Source – JR Pharmacy Services Client Averages

  25. COMPETITION 2005KPIs – Pharmacy, Warehouse, Supermarket P’cy W/hse S/mkt EBIT/sales 7.9% 7% 4.6%/7.6% Stock Turn - Retail 3.75 15 - Total 13.2 7.5 15 Retail GMROII $2.09 $1.89 $4.67 Source – JR Pharmacy Services Client Averages

  26. 2005

  27. Message Pressure PointSolution 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

  28. THE BIG SQUEEZEAn Analysis of the Pressure Points on Dispensary Profit Margins NORMAN THURECHT NThurecht@jr.com.au 07 3222 8316

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