As the pharmas grow strong our health system dwindles

Good to see pharmaceutical giants GlaxoSmithKline (GSK) and AstraZeneca doing so well in difficult markets. With much trading activity on hold until after the General Election, there has been an air of mild commercial depression about – a kind of fatalism that says whatever’s coming down the line, it won’t be good and we had better brace ourselves for whatever the Government plans after it has secured the business vote. But anyone would have thought from the good news at GSK and AstraZeneca that a free-markets, mid-Eighties version of Margaret Thatcher had just been cryogenically de-frosted and returned to power by a landslide.

GSK’s shares rose by some 80p to an all-time high late last week of &£13.18 on the news that the company had reached agreement, without a fine being imposed, with US regulator the Food and Drug Administration (FDA) over the manufacture of proprietary brands in Puerto Rico. Faulty drugs had been seized by the FDA, but the deal GSK has cut means that they’ll be back on the market by mid-year. Irrespective of this good news, GSK posted first-quarter figures that showed earnings-per-share well ahead of forecasts, with pre-tax profits up to &£1.7bn from &£1.56bn on sales up four per cent at a shade over &£5bn.

Meanwhile, AstraZeneca also exceeded forecasts in the first quarter, with pre-tax earnings up a blood-pumping 37 per cent at $1.49bn (&£784m) on a nine per cent sales increase to $5.74bn (&£3bn). The company has been developing pioneering treatments for conditions from ulcers to schizophrenia and is filing for US approval of a new asthma treatment in the second half of this year. This is evidently an industry in very good nick and shareholders in both conglomerates must be delighted.

Seasoned observers of this column will know that there is a “but” coming. Well, not really. At least, not in the short-term for shareholders – prospects in both concerns look robust with the US regulatory climate smiling on them. But – there we go – I do have to say that this level of prosperity in the pharmaceutical industry masks some fairly unsatisfactory circumstances in the domestic UK market. If I could rain on their parade for a moment, it’s on these circumstances that I wish to dwell.

It’s about the UK retail trade in pharmaceuticals – and it’s fascinating if only for the inversion of the commercial model of the superstore groups. Instead of suppliers being shafted by powerful retailers, we have a situation in the UK in which retail pharmacies stand to be shafted by their suppliers. This will doubtless make even more money for the shareholders of the likes of GSK and AstraZeneca, while costing independent pharmacists their livelihoods and the British taxpayer in further support for the National Health Service.

Let me explain. Pharmacists have traditionally made their money on the discount margin between the price agreed with the NHS for its prescribed drugs. These margins now stand to be eroded, or even extinguished, by manufacturers agreeing NHS prices that offer no such discount. Further good news for the major manufacturers and, presumably, for the NHS, which wants an efficient, streamlined and predictable market, but considerably poorer news for independent pharmacists, which constitute a vital, local distribution network for medicines.

The situation for major pharmacy chains, such as Boots and Superdrug, is mixed. Yes, they too suffer from margins being squeezed, but they are of sufficient size to offer economies of scale and enjoy a wider spread of product lines over which to spread their exposure. And, it has to be said, Boots needs all the help it can get competitively – independent, corner-shop retailers going out of business is of greater benefit than the profit-potential of wider margins from manufacturers’ discounts.

This is an issue of wider concern than simply the businesses of independent pharmacists – important as that is to them. This network was meant to develop a role in primary healthcare that relieves some of the burden on the NHS at a level of basic provision. If it goes, the burden of that provision returns to the NHS and consequently to taxpayers. Something that the Department of Health might like to chew over when it reconstitutes itself after the election.

But we might reflect that this market, which is integral to the provision of the nation’s healthcare, is too important to be left to politicians. I gather there is a move within the industry – and among the more enlightened mandarins of Whitehall – to establish a body, provisionally called the Healthcare Forum, to address the health of the market. This would comprise manufacturers, technicians, the retail trade and health professionals.

This seems sensible, if only because the idea that drug manufacturers’ profits are the only priority seems a profoundly unhealthy one.

George Pitcher is a partner at communications management consultancy Luther Pendragon