George Pitcher: Care in the community for the small pharmacy

As part of its healthcare plan, the Government should subsidise small chemists hit by the abolition of price controls on over-the-counter drugs.

My February 22 column addressed retail chemists (or community pharmacies as they are known by the pill-popping cognoscenti) and I suggested that there was a real opportunity for the Government to develop the role of this natural network in primary healthcare.

The pharmacies themselves have an enthusiasm for such a development because this unglamorous end of the retail scene is never going to enrich itself on the volume business of prescriptions, while relying on more lucrative margins from the limited associated markets of over-the-counter (OTC) pharmaceuticals and healthcare products.

It seemed to me that both the Government’s and the private sector’s best interests were, for once, identical. A perfect opportunity therefore presented itself for them to work together, literally for the health of the nation, in the management of medicine services, formalised advisory functions and even a degree of medication therapy.

Well, little did I realise how quickly the pressure on community pharmacies would develop and how the opportunity for the Government to act would turn into a necessity. The alternative being the destruction as we know them of many community pharmacies, which range from the mighty Boots or Lloyds down to the myriad privately run operations on street corners and council estates.

Last week the Restrictive Practices Court ruled on a case brought by the Office of Fair Trading, that an anachronistic old bastion of resale price maintenance, the price controls on OTC medicines, is unlawful and must be abolished. The way is consequently clear for the supermarket majors to slash the price of OTC medicines and all the recent market signals have indicated that the leading three, Tesco, J Sainsbury and Asda, have been champing at their bits to do so.

A first reaction is to pity poor old Boots. Just when it starts to spread its retail offer a little more sophisticatedly, some High Court judge rolls up and gives it a handbagging. Boots is likely to suffer hard from the supermarkets’ pricing aggression – Boots the Chemist generates some 85 per cent of group profits and has a 25 per cent share of the OTC medicines market, figures that can only be set to fall if the likes of Asda are serious about this market. The City clearly thinks so – Boots’ shares fell by more than six per cent on the day of the High Court’s ruling.

But Boots, though heavily reliant on the OTC market, is only part of the story – and not the most important part at that. Boots has economies of scale to deploy in reacting to regulatory interventions such as this. It is already moving into value-added markets, offering manicurists, massages and other health-related and (forgive me) “well-being” services at many outlets. There’s talk of Boots gyms and the brand name is being deployed for dentists and chiropodists.

Beyond the flagship Boots brand, the group plays host to a variety of valuable consumer brands – Boots Healthcare International, for instance, owns Clearasil, Strepsils and Nurofen. Boots owns auto-parts chain Halfords, which is reportedly trading well. In short, Boots has places to go beyond OTC pharmaceuticals.

Not so the small independent, unless the attractions of selling more deodorant and razors counts as a diversification opportunity. The network of small, independent chemists look like going to the wall as a direct consequence of the court ruling. The question we need to answer, as a matter of some urgency, is whether that matters or not.

A post-Thatcherite view of market forces would suggest that it does not. In the same way that people used to claim that we were never more than six yards away from a rat, I imagine that fans of modern retail development might soon claim that we’re never more than six miles from a superstore. Moreover, isn’t this just one of those socio-economic developments, like the ones that swept aside UK shipbuilding, coal-mining and farming?

Not exactly. The difference is in that point I made previously about community pharmacies and Government interests being aligned. No one could accuse the Thatcher Government of sharing the same interests as the miners, any more than we could accuse Tony Blair of sharing a political vision with the farmers. But this Government wants to – indeed has to – develop imaginative solutions in the primary healthcare sector. And so do retail chemists.

The consequence is that ministers have to give serious consideration to fiscal or financial intervention on behalf of the independent community-pharmacy sector, in the wake of the abolition of price controls. It is estimated that the pharmacy OTC-medicines market is worth some £900m in sales per year. That will shrink by some ten to 15 per cent as a result of the abolition of price controls. The shortfall, therefore, that community pharmacies are looking to make up amounts to something over £90m.

Not, I’d have thought, the kind of sum beyond even an iron chancellor, if there’s a policy imperative for doing so. As I say, this is not about subsidising a lame duck, but about the maintenance of a public service to which the Government is wholeheartedly committed, the loss of which could prove significantly more expensive for the country, let alone the taxpayer.

The Government has an opportunity here to create an important platform for its primary healthcare policy. And what better time to do so than during an election campaign?

George Pitcher is a partner of issue management consultancy Luther Pendragon

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