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CHEMIST WAREHOUSE SUBMISSION TO THE INQUIRY INTO THE ESTABLISHMENT OF A PHARMACY COUNCIL AND PHARMACY OWNERSHIP IN QUEENSLAND JULY 2018 Inquiry into the establishment of a pharmacy council and transfer of pharmacy ownership in Queensland Submission No 019

Table of contents 1. Introduction .......................................................................................................... 3 2. The true cost of regulation ................................................................................... 4 3. The overseas experience ...................................................................................... 7 4. Proposed way forward ......................................................................................... 11 5. Reference list ........................................................................................................ 12 SUBMISSION CONTACT: Damien Gance CW Retail Services Pty Ltd Inquiry into the establishment of a pharmacy council and transfer of pharmacy ownership in Queensland Submission No 019

1. Introduction Chemist Warehouse is a franchise network made up of of like-minded pharmacists committed to providing Australian consumers with the best quality healthcare at the most affordable prices. Chemist Warehouse is Australia’s Xth largest retailer by turnover, with sales of almost $X billion and more than XX,000 staff. Chemist Warehouse has in excess of 380 stores, representing about 7 per cent of all retail pharmacies across Australia. However, Chemist Warehouse sales make up ~ XX% of total retail pharmacy sales, dispensing around XX% of medicines covered under the Pharmaceutical Benefits Scheme (PBS). The pharmacy market is highly regulated. These regulations have the effect of artificially preventing business models within the pharmacy industry from evolving in the same way as has occurred in other similar, but unregulated, retail markets. Nonetheless, it is clear that there are two business models that are growing in popularity as consumers’ preferences change. The first is for large, high volume, lower margin pharmacies offering deep price discounts. Chemist Warehouse is the market leader of this approach, and has repeatedly been rated the number one pharmacy group for customer satisfaction (Roy Morgan Survey Data). The second model is for high service pharmacies offering detailed personal health advice and testing services, in addition to retail distribution of medicines and health products. In addition, online health and pharmacy websites are rapidly growing in popularity. Chemist Warehouse itself operates chemistwarehouse.com and epharmacy.com.au, the number one and number two Australian pharmacy websites by traffic and transactions (Hitwise). The development of the pharmacy industry into these models is consistent with the experience in many retail industries and suggests that consumer preferences, in the consumption of pharmaceutical goods and services, are no different from those for other retail goods and services. Chemist Warehouse acknowledges that ensuring access to medicines at affordable prices, particularly for disadvantaged consumers, is an important matter of public policy. However, the present policy settings not only fail to serve this end, but are preventing competitive market conduct that would be more effective in delivering more medicines at lower prices to more consumers. These restraints on ordinary trade should be removed in favour of a competitive approach to pharmacy in line with consumer demand and other retail industries. Overseas examples have demonstrated that once market limiting regulations are removed, outcomes are improved for industry participants but more importantly for consumers. In response to the Health, Communities, Disability Services and Domestic and Family Violence Committee’s (the committee’s) inquiry into the establishment of a pharmacy council and pharmacy ownership in Queensland we submit the following in response to issues for consideration; 1. Are pharmacy ownership restrictions imposed by the Pharmacy Business Inquiry into the establishment of a pharmacy council and transfer of pharmacy ownership in Queensland Submission No 019

Ownership Act 2001 (QLD)(Act) necessary to protect consumers and deliver accessible and affordable medicines and services? 3. Would changing the pharmacy ownership restrictions under the Act improve community outcomes? 4. Should the Act be amended to allow any party to own a pharmacy, subject to requirements for dispensing only by a qualified pharmacist? Would the community be better off under such a scenario? 9. Do you think there should be restrictions on the number of pharmacies a pharmacist may own in Queensland? 10. Given there are no restrictions in the Australian Capital Territory or the Northern Territory, are community outcomes in the Australian territories different from the Australian states? 2. The true cost of regulation Chemist Warehouse understands that the rationale for the extensive regulation of business models and conduct of Australian pharmacies is related to a desire to ensure equitable and universal access to medicines. However, Chemist Warehouse submits that the effect of these regulations threatens the opposite. The impact of regulation has been to raise costs for consumers, to prevent innovation in the industry and to undermine the value of investments. Chemist Warehouse contends that this heavy-handed regulation of the industry could put at risk its long-term viability. Chemist Warehouse believes that restrictions on who can own pharmacies is unnecessary and damaging regulation that should be reformed as a matter of urgency. Restrictions on who can own pharmacies The requirement that only pharmacists may own pharmacies, and that a pharmacist can own only five pharmacies in any one state, is unnecessary regulation that should be repealed. These constraints are creating financial instability that is more likely to threaten than secure the ability of the industry to continue to provide equitable and affordable access to medicine. The ownership rules, coupled with changes in the supply chain relationships in the industry in recent years, have created a serious capital constraint for the pharmacy industry. In practice, a group of pharmacies cannot accurately demonstrate its financial success or ability to meet substantial repayments, because pharmacy businesses must be registered in the name of individuals, rather than as part of a group. For individual pharmacists, ownership restrictions limit the market for those wishing to dispose of their business, suppressing prices and limiting credit worthiness. Inquiry into the establishment of a pharmacy council and transfer of pharmacy ownership in Queensland Submission No 019

For larger pharmacy enterprises, such as Chemist Warehouse, the ownership structure required by the current regulatory regime prevents capital raising to support innovation, expansion and modernisation. This constraint on Chemist Warehouse’s ability to operate as any modern business should, is illustrated by the fact that the business has previously been unable to raise an $XX million bank loan against an annual turnover at the time of $X billion with a X% profit margin. The complex ownership arrangements these regulations force on pharmacists who wish to be part of the Chemist Warehouse group of companies, means the banks cannot be confident that they will be able to secure collateral against their loans. These capital constraints are having increasingly serious impacts on the operation of the pharmacy industry. In the past, the pharmaceutical wholesaling industry was able to offset the inability of retail pharmacies to raise capital from the usual sources by extending generous trading terms to the retail industry. Crucially, this has included extended credit terms for wholesale supply. However, as PBS reforms have - in recent years – and continues to squeeze margins, the ability of the wholesale industry to provide this financial support has been eroded. Thus retail pharmacy nationally is under capitalized and this under capitalization of the industry continues to stymie innovation through under investment that inevitably leads to inefficiency and hence higher prices to consumers. The constraint on pharmacists from owning more than five pharmacies in a state, and locational rules that prevent pharmacist entrepreneurs from opening wherever and whenever they believe they can profitably do so, has had the effect of denying consumers the benefit of competition. Chemist Warehouse’s experience demonstrates that the introduction of competition into the market for pharmaceutical products in a particular geography is not confined to pharmacies. Chemist Warehouse has observed a competitive response by all retailers of medical products, once it enters a market and introduces its price discounting strategy. For example, when Chemist Warehouse entered the Tasmanian market, the price for the popular hay fever medication Telfast was more than $75. Chemist Warehouse retailed the same product at $29. Within months the prices charged by other providers had fallen to similar levels. It is an undeniable and inevitable direct consequence of the ownership rules coupled with the pharmacy relocation rules that they act to create local monopolies protecting the incumbent owners. These rules are to the detriment of both potential excluded competitors to the incumbent owners and those choice deprived local consumers. The pharmacy location rules act to insulate incumbents from the threat of new competition. When this protected status is dovetailed with the restrictive ownership laws, local monopolies naturally ensue. Chemist Warehouse has observed over time when external interested parties review the retail pharmacy sector they will often inappropriately intermix and confuse professional pharmaceutical service provision and equitable ownership of a retail business. The two are entirely unrelated. Under any proposed model that Chemist Warehouse would support in relation to pharmacy ownership, qualified, registered pharmacists would always provide all the professional pharmacy services. Under the current model of pharmacist only pecuniary interest, profits from theses businesses Inquiry into the establishment of a pharmacy council and transfer of pharmacy ownership in Queensland Submission No 019

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