Britain’s pharmaceutical companies are crying foul following last week’s court ruling repealing a price-fixing agreement on over-the-counter (OTC) products, leaving retailers free to cut the prices of branded medicines.
The Restrictive Practices Court has scrapped the resale price maintenance (RPM) law, which gave manufacturers the right to set minimum prices for OTC products (MW last week).
The drugs manufacturers are now preparing themselves for a fall in profits, and some say the ruling may force companies such as GlaxoSmithKline (GSK) to slash their marketing budgets.
Supermarkets, meanwhile, have every reason to celebrate – the removal of RPM means they will now be able to sell branded medicines and vitamins at much lower prices, run price promotions and bulk offers.
They are also likely to reap bigger profits on this high-margin business, estimated to be worth £1.5bn a year in the UK, without having to share the money with the manufacturers.
Retailers, including Boots, Asda, Tesco and Sainsbury’s have already announced reductions in the prices of branded OTC medicines of up to 50 per cent.
OTC sales of medicines and supplements were excepted from the abolition of RPM in 1964, resulting in many stores having to rely on own-brand alternatives if they wanted to cut prices. The last equivalent to RPM was the net book agreement, which set a minimum level for the price of books. This collapsed in 1997, following a campaign also led by the supermarkets.
Not surprisingly, most of the major drug companies refuse to say how the removal of RPM will affect their profit margins, and in turn, their marketing budgets.
But one drug manufacturer says the decision to overturn 30 years of restrictive practices under the RPM rule is likely to have a knock-on effect on marketing spend, since these budgets are funded by profits.
The fat profit margins of big companies like GlaxoSmithKline (GSK) – which reported £1.39bn pre-tax profits in the first quarter of 2001 – hit the headlines earlier this year when the pharmaceutical giant took the South African government to court to stop the import of cheaper drugs to combat Aids.
GSK contended that the cheaper drugs ought to be banned because they were copies of its own patented formulations.
But the court action provoked outrage and laid bare the fact that some medicines are priced at eight to ten times the cost of their manufacture and distribution (excluding research expenses).
The pharmaceutical companies maintain that their primary reason for supporting the RPM law is to protect small chemists and pharmaceuticals from being forced out of business through competition from the supermarkets.
The Community Pharmacy Action Group (CAPG), which was campaigning for the retention of RPM, claims that 12,000 local pharmacists could disappear as a result of the court ruling.
But critics say it is not through the “goodness of their hearts” that the drugs giants have pledged to support the small pharmacies.
One industry insider says: “These companies sell not only OTC medicines to the small pharmacies but a whole range of products – from Anadin to foot creams and even energy drinks. If these smaller outlets were to shut down, that would affect a large volume of their sales.”
A recent research note by analysts at brokerage WestLB Panmure claims that GSK’s profits are likely to be virtually unaffected by the price reductions since OTC products constitute only one per cent of the company’s UK sales.
The analysts say companies such as SSL International, maker of Remegel antacid, which rely more heavily on OTC brands, will be more vulnerable to the removal of RPM.
They add: “We estimate that about eight per cent (£50m) of [SSL’s] group sales in the UK are generated from OTC product. However, most of these sales are of lesser brands which should not be as much at risk from price discounts.”
A spokeswoman for SSL says the company has no plans to change its marketing strategy. “If the big retailers are cutting prices then the manufacturers might increase their volumes, not to say that we are looking at doing that at the moment. And the likes of Asda will do what they always do – cut prices,” she adds.
Jennifer Harrington-Rutterford, divisional manager of healthcare at Promar International, believes that lesser brands will not necessarily escape unscathed.
She says: “The likes of GSK and Johnson & Johnson will not be at risk, but the companies which will lose out are those whose brands are third or fourth in the league tables. They will either have to slash their prices or gear up their branding and marketing exercises.”
GSK insists it is too early to say whether the court ruling will affect its marketing plans, but says: “Without doubt [the ruling] will affect the smaller pharmacies which will have to shut down because of the intense competition from bigger retailers.”
The company recently embarked on a review of its creative advertising business in the US, which may be extended to the UK and Europe, following the merger of Glaxo Wellcome and SmithKline Beecham earlier this year.
The £30.1m (ALF March 2001) UK creative account is shared between Grey Worldwide, Ogilvy & Mather, McCann-Erickson and M&C Saatchi, which handled the corporate branding campaign for the merger.
Richard Perks, senior retail analyst at Retail Intelligence, believes it is “scare-mongering” on the part of the big drug companies to say the abolition of RPM will lead to the closure of smaller pharmacies.
“The major retailers have been giving intense competition to the smaller players for years, and the local pharmacies have more or less given up competing with these bigger players,” he says, adding: “The main income of the smaller pharmacies comes from dispensing prescriptions.”
Value Engineers director Steve Purnell foresees a period of instability in the pharmaceutical market as the smaller players struggle to ensure their survival.
“The smaller pharmacies will have to find a different angle and invest in their service levels, for instance. Also it would be in the interests of the manufacturers to help sustain the smaller pharmaceutical outlets,” he says.
Some argue that manufacturers of pills and potions do not need the protection of price-fixing, since their ability to patent new drugs, pricing them high and then marketing them aggressively, helps secure profits.
But for the major drug manufacturers, this shift in the balance of power towards the retailers, and the resulting dent in profits, however small it may turn out to be, is a bitter pill to swallow.
As one drug manufacturer says: “We might have to take the costs of all the price cuts from the big retailers, but the question is: why should we be expected to?”