Pharmacy liberalisation on hold – a portent of things to come?

London, 17th December 2008 – While the EU’s decision to halt the process of pharmacy liberalisation is clearly based on the merit of the specific case (Doc Morris – the leading European online pharmacy – trading as a bricks and mortar discounter under a franchise model in Germany) we could be witnessing a sea change in terms of EU decision making. Arguably we are slowly moving away from favouring ‘excessive deregulation’ towards a slower and more considered approach – with all the costs and benefits this brings for EU consumers and patients.

Yves Bot, advocate general at the European Court of Justice, has released a non-binding statement supporting German and Italian laws restricting retailers from owning pharmacies in both countries. According to Mr Bot, the laws are valid if the objective is to ensure an adequate supply of medicinal products to the public. While this is not the final say in the matter, the European court usually follows its advisers’ guidance. This also sets back liberalization in Austria, France and Spain. Another factor in the decision is the fact that the European Union has no overriding power over national health policy.

For years it seemed likely that liberalisation of the German pharmacy market was to go ahead to allow for increased competition. EU legislation looked to change Germany’s restrictive ownership model, under which every owner had to be a licensed pharmacist and was allowed to run and own a maximum of four pharmacies. Retailers, private equity players and pharma wholesale companies were closely monitoring the situation and many expected drug store chains such as Schlecker and Rossmann to be in a prime position if liberalisation was to get the go ahead to work existing footfall harder and increase their sales. Grocers also showed their interest in the market and considered moving into the lucrative sector. The German pharmacy market is worth around €35bn and margins are attractive at between 5.0% and 12.0%, considerably higher than in grocery where the typical margin lingers around the 3.0% mark. In the meantime many non-pharmacists (such as Schlecker, Rossmann and DM) have started operating Internet mail order services with the pharmacy located in the Netherlands and prescription drugs sent directly to consumers in Germany. That said, the online channel accounts for only a marginal proportion of sales at the moment.

While countries with a relatively liberal trading environment such as the UK and the Netherlands (where Doc Morris is from) show that the basic supply of the population with medicines can be guaranteed by a different system, than the one in use in Germany, Spain and Italy, the status quo regarding pharmacies in these countries looks likely to remain unchanged for now.

What has come as a big surprise to many market observers and companies in the sector might hang together with a broader change in the political climate. In the wake of the sub prime crisis and the credit crunch ‘excessive deregulation’ of the financial services sector has come under heavy criticism. “The EU will remain committed to its core principles, one of which is the guarantee of free trade among its borders. However we could be witnessing a change of paradigm and a much more considered and slower approach to deregulation in future”, says Daniel Lucht, Senior European Analyst at Verdict Research.

Meanwhile the outlook for the European pharmacy/drug store sector is rosy as the EU is suffering from a rapidly ageing population profile. This increasingly ageing demographic will need more medical attention and care in future, as such these players will grow whether they can add pharmacy services to their offer and proposition or – as it looks increasingly likely for now – not.