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Future of community Rx: building a sustainable industry.

Pharmacy is one of the foundational pillars of modern medicine and many of today's leading pharmaceutical companies can trace their origins back to a pharmacy entrepreneur.

However, in many developed markets retail pharmacy, chains as well as independents, is now at a crossroads. It must either become far more efficient and change its role in the health care delivery system, or face a future of eroding margins and loss of relevance.

A.T. Kearney recently published a paper which examined the future of retail pharmacy in the United Kingdom. While the regulatory and business environment for pharmacy varies widely between countries--and the United Kingdom has some very specific challenges--many of the conclusions are relevant to pharmacy in other developed markets, including the United States.

The United Kingdom has a reasonably open regulatory environment for pharmacy. While pharmacy licenses are controlled by the government, corporate ownership of pharmacies is allowed, and 40% of retail outlets and 60% of pharmacy medicine sales are accounted for by 10 supermarkets and four pharmacy chains.

Vertical integration is also allowed, and all the major pharmacy chains are part of groups that include drug wholesalers.

In the United Kingdom overall industry revenues for dispensing are capped by the government. The U.K. government is keen to encourage pharmacies to play a stronger role in managing chronic conditions and has introduced payment for new frontline services such as medicine reviews.

Independent pharmacies have long been the backbone of community services, and there is a strong wish to both retain and build their role.

However, for some years there has been a growing debate as to whether retail pharmacy in its current form is sustainable. While everyone recognizes the vital role that pharmacies play in the delivery of frontline care, the reality is that the economics of retail pharmacy are under pressure and the model, particularly for independent pharmacists, is at a breaking point.

Five forces will continue to reshape the industry:

* Squeeze on health care budgets: Despite rising demand and volumes, the overall money paid by the government for pharmacy dispensing will remain flat in real terms. Payments for frontline services are unlikely to bring along net new money and will be financed by reduction in dispensing revenue.

* Intensifying competition: Chains and supermarkets are an increasingly competitive force. The majority of recent pharmacy licenses have been acquired by supermarkets.

* Transformation of the supply chain: As drug manufacturers struggle to make a profit in primary care products, alternative distribution arrangements are threatening wholesaler profits and reducing the revenue that pharmacies' can make from effective drug procurement.

* Emergence of new alternative channels: With the rise of the connected consumer, Internet distribution will continue to grow, replacing brick-and-mortar pharmacies.

* Demand for convenience and expertise: Today's health care consumer expects increasing levels of expertise, convenience and accessibility. And this costs money to deliver.

All pharmacy providers will have to meet these challenges. Independent pharmacies, in particular, will be severely impacted with a very real prospect that up to 900 outlets could be closed. To survive, pharmacies of all sizes need to both attack costs and change their role:

* Improve efficiency of supply. Pharmacies need to improve their efficiency in filling prescriptions by at least 20% to continue to make a reasonable profit on dispensing. This can only happen with investment in dispensing automation.


Pharmacy chains will need to centralize dispensing within their own networks. Independent pharmacies will need to rely on wholesalers to deliver central dispensing services, or develop cooperative or joint-partnership models.

* Become the first port of call in the health care system. As dispensing becomes a commodity, pharmacies need to develop a sustainable revenue stream based on monetizing their role in the front line of care.

In the United Kingdom much of this revenue might come from national government or local government, but the selling of health care services directly to consumers will play an increasingly important role.

Our findings suggest that pharmacies that push forward in both these directions will be able to maintain their revenue. But doing so will require up-front investment and will not be without risk.

Critically, pharmacists cannot do it alone. Government and regulators must provide an enabling environment, and the profession needs to demonstrate leadership in building the capabilities required in the new model. We believe seven enablers, if appropriately aligned and addressed, can ensure the industry is rebuilt on a solid foundation:

* Healthcare system integration to enable pharmacy to emerge as a cost-effective alternative to primary, and in some cases acute, care.

* Funding changes to move the industry away from being paid to process scripts to delivering value to the health care system.

* Market management to align government licensing arrangements to the needs of the market.

* Representation of the industry to make its case more effectively.

* Regulation changes to enable efficiency improvement.

* Education of pharmacists to build new skills for care delivery and patient engagement.

* Mind-set change by pharmacists to change their role in health care delivery.

Change will not be easy and will require significant investment and commitment from within and outside the industry, and not all current pharmacies will survive in their present form. However, this may well be the last chance retail pharmacy gets to reinvent itself as a credible contributor to the improvement of the health of the nation, and to ensure its financial survival.

The full paper "The Future of Retail Pharmacy in England" is available for download from the website.

Jonathan Anscombe is a parmer in the Health Practice of A.T. Kearney, a global management consulting firm. He can be reached at Paula Bellostas Muguerza is a consultant in the same practice. She can be reached at
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Title Annotation:RX/News
Author:Anscombe, Jonathan; Muguerza, Paula Bellostas
Publication:Chain Drug Review
Geographic Code:4EUUK
Date:Oct 22, 2012
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