Australia / Analyst Insights
Pharmacies pursue new growth areas to offset PBS price declines
by Kevin Wu
Jun 03 2016

Over the five years through 2015-16, pharmacies have suffered from slow revenue growth, mainly due to the ongoing Pharmaceutical Benefit Scheme (PBS) regulatory reforms that have reduced the average price of prescription medicines. The Australian pharmacies industry is a highly regulated business sector that derives the bulk of its revenue from prescription medicines dispensing, which accounts for 61.5% of total sales among other products such as non-prescription medicines, general retail products and cosmetics products.

Despite the contracting revenue from prescription medicines, the gradually aging population and people’s rising health consciousness have opened up new opportunities for pharmacy giants like My Chemist Retail Group and Australian Pharmaceutical Industries Limited. These firms have been able to remain competitive by further boosting their front-of-store non-prescription medicine sales, thanks to the growing demand for healthcare and cosmetic products.

My Chemist Retail Group is Australia’s largest pharmacy retailer, accounting for 20.0% of the pharmacies industry revenue. The group operates two popular brands under two different models. Chemist Warehouse is a large-scale, deep-discounter pharmacy that offers consumers everyday low prices. My Chemist follows a pharmacy model that focuses on health and beauty products.  The company’s business model relies on price competition and volume sales of health supplements and cosmetic products, which has helped counteract the drop of revenue from pre

scription drugs. Additionally, after recognising the growing demand and buying power of Chinese consumers, Chemist Warehouse partnered with Tmall, the most popular online shopping website in China, to open its first overseas online store. The online store offers Chinese mainland consumers a wide range of healthcare and cosmetic products and is projected to achieve sales of $88 million in the current year. Most pharmacies in the group are owned by individual pharmacists, but many are under the control of private company East Yarra Friendly Society Pty Limited. The group is expected to generate pharmacy revenue of $3.1 billion in 2015-16 with annualized growth of 14.1%, outperforming the industry.

Australian Pharmaceutical Industries Limited (API) operates in the pharmacy industry through one of its most popular brands, Priceline Pharmacy. Priceline has found some success with a similar model to Chemist Warehouse, as it has a lower reliance on dispensary items and a greater focus on its mass-market health and beauty products. Priceline’s sales of these products account for 27.0% of the Australian beauty market. Besides dispensary sales, annual revenue for the total Priceline network currently exceeds $1.0 billion. Over the past five years, API has contended with a difficult retail trading environment due to limited consumer spending and intensifying competition. In 2015-16, combined sales from the group are expected to reach $1.6 billion, with annualised growth of 1.0%.  Despite the weak growth, the group is still expected to outperform the industry as a whole, partly due to further growth in its Priceline Pharmacy chain and operational efficiencies.

Over the next five years, the pharmacy sector will continue to face challenging conditions due to ongoing reforms to the PBS as well as external competition from supermarkets and other non-pharmacy outlets that are now able to sell pharmacy products due to scheduling changes. In order to minimize the profit lost from dispensary sales, pharmacies will continue to explore new opportunities internationally and domestically in order to maintain strong market shares.

 

Relevant companies:

East Yarra Friendly Society Pty Limited

Australian Pharmaceutical Industries Limited