Sea Point’€™s Main Road is a monument to consumerism. Shops of all shapes and sizes, festooned with neon signs and colourful lights line the bustling street and compete for business in this cosmopolitan, Cape Town village.

In a three-kilometer stretch of this commercial artery no less than ten pharmacies, of varying shapes and sizes, are sandwiched between fast food outlets, 24-hour bars and corner supermarkets. Some of the chemists are located so close by that, should they need to, competing pharmacists could wave at a competitor from the shop door.

Government statistics reveal that the average South African pharmacy services less than 3 000 people, very low by international standards. In the UK the average is 5 000 people per pharmacy while in some Scandinavian countries there is one pharmacy for every 17 000 inhabitants.

Perhaps it is not surprising then that many South African pharmaceutical outlets are on the brink of bankruptcy, and this even before government announced controversial plans to control medicine prices in this country.

The Pharmaceutical Society of South Africa’€™s (PSSA) Lorraine Osman estimates that at least 30% of pharmacies are already ‘€œstruggling’€. Earlier this year the PSSA revealed in a submission to the Department of Health that 24% of pharmacies were loss-making businesses.

It appears that the realisation has begun to sink in that the proposed new laws to control medicine prices could be the final blow for these ‘€œcorner’€ pharmacies.

The causes of their discomfort are many, and apply to a greater or lesser extent to most retail pharmacies. For some, the real knock came in the late 1980s, when doctors began dispensing medicines.

For others, the greatest challenge has been to hold on to their customers as courier pharmacies lure away more lucrative chronic prescriptions. All have had to contend with a largely static insured population (7-million South Africans on medical aid) which is battling to pay increasing premiums.

Medical schemes themselves have also been under pressure to do more with less and have squeezed their suppliers, including pharmacies for higher and higher discounts.

Medical aid claims have become more and more complex as schemes’€™ options and exclusions multiplied.

Where the state had previously relied on private pharmacies to dispense medicines for elderly patients on chronic medication, this business was also lost as the old ‘€œdistrict surgeon’€ system was dismantled.

Much of the trouble could also be traced to the complex and obscure nature of the pricing system. Some retailers (both pharmacies and doctors) were able to wring high discounts out of manufacturers. The variability of the actual price paid by the retailer was massive. Those able to access these deep discounts could charge the same as everyone else, or could pass on some of the discount to the consumer. Private hospitals, for example, could sell at the apparent wholesale price, with no mark-up at all. That was only made possible by the size of the discounts and rebates available to such large buyers.

For the corner pharmacy, things were generally more difficult. If the pharmacist bought at the listed wholesale price and added the normal mark-up (50%), the discount demanded by the medical aid could almost wipe out the margin. A discount of 33,3% brings the final price back to the starting point and discounts of 30% were routinely demanded for chronic medicines.

Then there is the vexed question of big corporate involvement, for example New Clicks and Protector Group Holdings. All of this leads to the obvious question of whether the problem is not simply that the smaller ‘€œcorner’€ pharmacies have outlasted their usefulness.

International opinion on this issue is deeply divided. In the United States and United Kingdom, corporate ownership of pharmacies is the norm. However, on the Continent, as well as Australia and New Zealand, ownership is still restricted to pharmacists.

As things stand, Government has proposed a R26 (scripts of R100 or more) and 26% (scripts under R100) dispensing fee for schedule 1 to 8 drugs. A dispensing fee of R16 (R100 or more) or 16% (less than R100) is proposed for schedule 1 and 2 medicine without a script.

Government argues that specifying maximum dispensing fees is fully in line with medicine regulation approaches used internationally. The level of the fee is also considerably more generous than in countries that have effective medicine price regulation. For example, the dispensing fee in Australia is 10% on most medicines, but as low as 4% on high cost items.

The PSSA has called for a higher fee which it contends is based on an extensive modeling exercise using more than 70 million prescriptions, more than 40 million wholesale transactions and the financial records of more than 700 pharmacies.

New Clicks has been more direct, proposing a dispensing fee of R35/35% which equates to a gross profit of 26% and ‘€œa more viable level for pharmacy.’€
The arrival of New Clicks has prompted the opening of supermarket-type pharmacies in mostly urban areas and has undoubtedly been a huge setback for the corner pharmacy. Both New Clicks and Protector Group Holdings, a healthcare group owning more than 34 pharmacies, have been buying retail pharmacies for a song.

But should consumers be signing petitions in support of their dying corner pharmacies or should their biggest concern be whether they are paying a fair price for medicine? There is agreement that for many years consumers have been exploited paying hugely inflated prices for medicine.

The question is who has been pocking the excess all these years?

In trying to make sense of the debate, we need to pause and take a few steps back.

While pharmacists seem to indicate that the proposed changes have come out of the blue, the writing has clearly been on the wall for a long time. It’€™s just nobody expected the degree of intervention that has been proposed by Government.

Medicine pricing was already concern as far back as 1962 when the Snyman Commission was set up to investigate the high cost of medical services and medicines. It was suggested then that pharmaceutical staff be encouraged to practice generic prescribing and substitution.

In 1996 the National Drug Policy was formally launched indicating that regulations would follow to address the high price of medicine.

Some will argue that the current crisis in pharmacies could have been averted to a degree if they had diversified their business and not relied so heavily on an income from prescription drugs.

German pharmacies do not stock a wide range of ‘€œfront shop’€ items that are common in the UK or South Africa. In Germany the supply of medicine and advice ‘€“ the key professional tasks of the pharmacist ‘€“ are lucrative enough to sustain the practice.

One of the first to see the gap was Clicks which stated its intention in the early nineties to replicate the hugely successful Boots chain in the United Kingdom a one-stop shop for among others toiletries, beauty products, appliances and prescription medicine.

In order to dispense medicine at the time, Clicks needed to get the law altered which would allow non-pharmacists to have shares in pharmacies.

Not surprisingly the PSSA vehemently opposed this move and they still do, citing strong support from the International Pharmacy Federation and the Commonwealth Pharmaceutical Association.

For years Clicks were unsuccessful but in 1997 an amendment to the Pharmacy Act allowed the Minister of Health the right to decide who would own a pharmacy. The stated intention of the amendment was to allow for access in under-served areas.

After this, Clicks took two massive risks. It funded the purchase of 80 existing retail pharmacies by Purchase, Milton and Associates. Clicks also bought United Pharmaceutical Distributors, a wholesaler.

Wholesalers purchase in bulk from pharmaceutical manufacturers, negotiate huge discounts and then sell and distribute the drugs to pharmacies or other relevant outlets.

Up to now, New Clicks has obtained 57 operating licenses from the Department of Health allowing the company to   ‘€œbuy’€ back the Purchase, Milton and Associates retail pharmacies. The licenses were granted despite the fact that Clicks does not operate in rural areas where access to prescription medicine is often scarce.

New Clicks is now in the process of re-branding the 80 pharmacies as Clicks outlets with dispensing services and continue to seek out other pharmacies to buy while at the same time trying to obtain pharmacy licenses for existing Clicks stores.

The latter is the part that ‘€œreally gets up the noses of retail pharmacists’€ as one source put it. Especially those pharmacies that are closely situated to existing Clicks stores.

To add to the pain, Clicks has also acquired 56% of the Link Investment Trust, a franchise holder of the Link and LinkMax branded pharmacies.

But some are whispering that the risk New Clicks took may have been too big and some heads may roll should the dispensing fee not be increased.

Clearly a company which is listed on the Johannesburg Stock Exchange and owns a number of subsidiary companies including Clicks, Discom, UPD, Musica, CD Warehouse and The Body Shop, would not have invested in the pharmacy industry, unless there was money to be made. But they may have underestimated the extent to which Government was willing to regulate.

Initially, the PSSA backed the concept proposed by Government, but their continued support depended among others on Government’€™s ability to manage the awarding of licenses for dispensing doctors.

PSSA director Ivan Kotze says it is a fallacy to think that the restriction on dispensing by medical practitioners would supplement the income of pharmacies to such an extent that the published dispensing fee would then be adequate.

‘€œThere is a cost involved in the dispensing of medicine and to merely say that an increase in the number of prescriptions will make a pharmacy viable is not justified.

The cost of dispensing includes time, and the number of prescriptions that can be filled is limited. In addition, salaries, rental and other business costs must be covered,’€ says Kotze.

This is one of the issues likely to be debated in  the upcoming court case, with government claiming that these factors were taken into account, but with the guiding light being serving the public interest rather than seeking to protect profits in the face of inefficient practices.

Kotze added that the demographic spread of dispensing doctors was also not even and the restriction on dispensing doctors in, for example, a small town would make a difference to the survival of a pharmacy in the same town, provided that the fee covered the basic cost of dispensing.   In the meantime Government has messed up and issued dispensing licenses to all doctors who complete the prescribed course.

‘€œI think this is where the train finally left the rails (for the pharmacy industry). They were positive because they knew that even if the dispensing fee would be capped, they would benefit from a significant increase in scripts from patients who previously got their medicine from doctors,’€ said a Health Department source.

In the meantime Government and an unlikely group of interested parties, including New Clicks, the PSSA and Netcare (among others) will be squaring up in the Cape High Court next week over the dispensing fee. The likely outcome is unclear, but for once the consumer is set to benefit.

E-mail Anso Thom