The Canadian Generic Pharmaceutical Association and the Pan-Canadian Pharmaceutical Alliance announced a deal between federal, provincial and territorial governments that would lower the prices of 70 of the most commonly prescribed generic drugs by up to 40.0% over the next five years, which began on April 1. The ramifications of this announcement are expected to manifest throughout the pharmaceutical supply chain. While this decision will inevitably aid consumers and governments by lowering their healthcare costs, it is expected to constrain pharmaceutical product manufacturers’ profit margins while pressuring distributors’ and retail pharmacies’ growth. Ultimately, the consequences of these price dynamics are yet to be fully understood, but one of the most powerful harbingers of upcoming trends is Rexall Health’s closure of 40 stores in Ontario and western Canada, which is currently underway.
Pharmaceutical pricing pressures
Upstream drug makers in the Brand-Name Pharmaceutical Manufacturing industry and the Generic Pharmaceutical Manufacturing industry have contended with wavering growth prospects in recent years. Lowering generic prices is forecast to exacerbate this uncertainty. The increasing prevalence of generic pharmaceuticals, including biosimilar products, has contributed to weaker prospects for brand-name drug makers. Ultimately, the pharmaceutical sector is shaped by the utilization rates of patented and generic drugs. According to data from the Patented Medicine Prices Review Board, brand-name pharmaceutical sales comprised 43.2% of all drug sales in 1990, rising to a high of 72.7% in 2003, and dropped down to 60.7% by 2013. IBISWorld expects this number to fluctuate, increasing to an estimated 61.9% over the five years to 2018.
This stabilization in generic drug utilization rates has pressured brand-name pharmaceutical manufacturers as they endure continuous generic competition after their patent protection ends. A series of patent cliffs has contributed to oscillating profit margins for these producers, but the introduction of new drugs has offset this trend. IBISWorld expects revenue for brand-name pharmaceutical manufacturing to rise 2.1% in 2018 alone, although this figure belies the significant price premium of patent protected products. Plus, this projection may be jeopardized by the decrease in generic drug prices. While these operators generate the bulk of their sales from patent-protected products, legacy pharmaceuticals still account for a large share of their revenue, and these are the drugs that are susceptible to generic competition.
Generic drug manufacturers have exhibited more rapid growth in terms of volume. However, the lower price point of their products lessens the impact of their output when measured in sales. In 2018, IBISWorld expects revenue for generic pharmaceutical manufacturing to rise 1.4%. Generic pharmaceuticals can be produced by any operators that meet Health Canada’s guidelines for pharmaceutical production. As a result, there is significant price-based competition, with discounts regularly exceeding 75.0% of their name-brand counterparts. After this additional price decrease, some generics will boast up to a 90.0% discount, boosting demand for these products.
The domestic pharmaceutical market is heavily influenced by foreign competitors as well, with imports satisfying an estimated 84.0% of domestic demand in 2018. Accordingly, the conditions that are prevalent in the Global Pharmaceuticals and Medicine Manufacturing industry is pertinent here. Revenue for this industry is expected to increase 2.6% in 2018, aided by generics growth in emerging markets and the high prices of patent-protected drugs. This trend is evidenced by the decline in profitability for global drug makers from 17.4% in 2013 to 14.7% in 2018. According to IBISWorld estimates, generics account for 31.4% of pharmaceutical sales globally, but in terms of volume, they represent a much larger share. Decreasing the prices of generic drugs can facilitate import competition from low-labour-cost countries that can handle the profit pressures better than domestic producers, shaping the Canadian pharmaceutical sector moving forward.
While this price evolution is projected to hit upstream producers the hardest, these decisions will indelibly shape downstream distributors and retailers. McKesson Corporation, the parent company of the Rexall Health pharmacy chain, operates in both industries as a vertically integrated medical supplies and equipment wholesaler and retailer. The company’s decision to close stores amid growth in the broader Pharmacies and Drug Stores industry points to patterns outside of strict retail operations. For example, operators in the Pharmaceuticals and Pharmacy Supplies Wholesaling industry have struggled to maintain profitability over the five years to 2018, with profit margins sinking from 6.2% in 2013 to an estimated 4.2% in 2018. While McKesson has an estimated 22.3% market share in this industry, distribution has been its primary objective for most of the company’s history, which may have contributed to its decision to close a portion of its retail operation as opposed to distribution networks.
Meanwhile, McKesson captures an estimated 26.3% of retail pharmacy demand domestically but is transitioning to a business model based on more healthcare service as opposed to simply product sales, which further contributes to its decision to consolidate its retail operations. This shift to value-added services is a crucial strategy with a projected 0.8% growth in revenue for retail pharmacies over 2018. This slowing growth is primarily due to intensifying competition up and down the supply chain, and drug price decreases are expected to further constrain industry growth since pharmaceutical sales comprise an estimated 67.2% of all industry revenue on average for retail pharmacies. As a result, while profit has been improving over the five years to 2018, shifts in drug prices may facilitate a more rapid transition to value-added services from other industry players to maintain profitability. Profit is also pressured by higher minimum wage laws and cutbacks in government subsidies for pharmacists’ services such as medication counselling. Loblaw, which owns Shoppers Drug Mart, the largest drugstore chain in Canada, expects healthcare reforms alone to contribute to declines in operating profit by $250.0 million in 2018. McKesson is not alone in this paradigm shift.
Historically, the decision to reduce generic drug prices has been the purview of provincial and municipal governments. This is one of the first concerted efforts among both provincial and federal governing bodies to unilaterally accept these changes. This broad move was precipitated by Quebec’s July 2017 announcement of a similar agreement within the province. The vanguards at Quebec have facilitated a crucial moment in the pharmaceutical sector with consequences up and down the supply chain. While the outcome of this decision, which was implemented on April 1, is yet to fully come to fruition, the closure of 40 Rexall Health stores is a salient indicator of what is to come and reflects long-standing trends throughout the healthcare supply chain domestically and abroad.
Edited by Rebecca Simon. Designed by Tafannum Rahman.
Industry Impact: Brand-Name Pharmaceutical Manufacturing; Generic Pharmaceutical Manufacturing; Global Pharmaceuticals & Medicine Manufacturing; Pharmacies & Drug Stores; Pharmaceuticals & Pharmacy Supplies Wholesaling
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