The pharmacy sector is a thriving part of the Australian economy, one that is expected to continue to show strong growth over time. Research conducted under the Community Pharmacy Agreement1 forecast demand for pharmacy services would in the future considerably exceed supply. This increasing need for pharmacy services is the key challenge - as well as the key opportunity - the industry must address.

Although the pharmacy sector is a vital and robust part of the Australian economy, underneath it lie shifting sands.

Research shows some of the key trends in pharmacy are:

1. Feminisation of the sector: growth in number of females in the industry is exploding.
2. Succession planning challenges: as pharmacies have grown in value, it has become more challenging for junior partners to buy into a pharmacy.
3. Increasing competition and pressure on margins: from supermarkets and barn discount pharmacies.
4. Industry consolidation: further consolidation in the pharmacy sector is expected, as pharmacies join forces to leverage buying power.
5. Systematisation: increasing automation, as well as electronic prescriptions, are key industry trends.

This report will explore these and other trends in the pharmacy industry sector, drawing on research by Access Economics (sections 1-3) and interviews with three senior members of the pharmacy sector.

The pharmacy sector makes the fourth biggest contribution to Australia's GDP2 of all the major health subsectors3 identified in Access Economics' research.

• In 2007 the pharmacy sector made up 0.21 percent of Australia's gross domestic product, which equated to total revenue annual of $2.19 billion.

The pharmacy sector will experience the strongest headcount growth of the major health subsectors between now and 2038.

• Of the 10 health subgroups the report analysed, there is expected to be higher growth in the number of pharmacists in the workforce than any other subsector; with headcount in pharmacy expected to grow by 160 percent between 2007 and 2038.

• Pharmacists don't earn as much as many other professional health workers (as defined by the subsectors listed above) and male pharmacists earn substantially more than female pharmacists.
• The average income for a pharmacist in 2006 was $64,376, a 46 percent increase on the average income earned by a pharmacist in 1996.
• Pharmacists earn 43 to 50 percent more than the average Australian.
• But, on average, pharmacists don't earn as much as other professional health subgroups. In 2006:

• The average income earned by a male pharmacist was $73,528.
• The average income earned by a female pharmacist was $57,252.
• The average male professional health worker earned $86,372.
• The average female professional health worker earned $68,848.
• The average male Australian earned $51,225.
• The average female Australian earned $33,852.

• Incomes for pharmacists were highest in regional WA (outside Perth) and lowest in Sydney.

2. Access Economics (2008), The value and business of Australian health care.
3. The ten subgroups are: GP's, ophthalmologists, radiologists, cardiologists, anaesthetists,gastroent erologists, ear nose and throat specialists, dentists, veterinarians, and pharmacists.

The number of female pharmacists has risen dramatically.

• Between the 1996 and 2006 census periods, the number of female pharmacists in the active workforce has grown from being slightly less than males in 1996 (47.6 percent) to around equal in 2001 (51.9 percent), and to slightly more in 2006 (56.0 percent).
• The current rate of feminisation is projected to continue to a peak of two-thirds of pharmacists being female around 2025.
• The average female pharmacist works 32.8 hours per week, some nine hours fewer than her male counterpart (41.9 hours per week).

Exponential feminisation of the industry is expected to continue.

• The number of female pharmacists is expected to jump by 16,406 between 2008 and 2038.
• The number of male pharmacists in the workforce is expected to grow from 7,460 in 2008 to 16,057 in 2038.
• The number of female pharmacists in the workforce5 is expected to grow from 7,989 in 2008 to 24,395 in 2038.

4 The Australian Institute of Health and Welfare (2003)
5 These figures relate to the number of full time equivalent staff

The Australian Bureau of Statistics 2006 census data estimated 46,539 people (pharmacists and others) worked in the pharmacy sector.

Pharmacists predominantly work in retail pharmacy outlets.

• Nearly four out of five, or 78 percent, of pharmacists work in retail pharmacy.

Split of the active workforce (%):

• Retail 78.0
• Hospital/clinic 15.4
• Industrial 1.5
• Administration 1.1
• Education 1.0
• Other 3.1

The pharmacy workforce includes people other than qualified pharmacists, including:

• Pharmacy dispensary technicians.
• Pharmacy sales assistants.

• In the retail pharmacy sector, for every pharmacist there are 2.5 pharmacy assistant employees.
• In hospitals the ratio is almost reversed with two pharmacists for every pharmacy assistant employed.

There are currently 16 schools of pharmacy offering pharmacy degree programs in Australia.

• From 1985 to 2007, pharmacy school graduate numbers have steadily grown.
• In 1985 there were 338 pharmacy graduates; in 2007 there were 1,427 pharmacy school graduates.
• Since 2003, pharmacy graduate numbers have been heavily tipped towards female graduates, with roughly 50 percent more female graduates each year than males. The number and gender balance of current and projected pharmacy school enrolments indicates recent graduate supply trends will continue.

responding to the challenges and opportunities in the Australian pharmacy sector

Increasing competition; a renewed focus on service delivery; and changing customer expectations about the services and service levels a pharmacy provides are three of the key trends pharmacist Nicole Hardwick thinks are affecting the pharmacy sector at the moment. Hardwick is a partner in three pharmacies, has been a pharmacy owner for nine years and has worked as a pharmacist for 15 years.

While negotiating these new trends will require effort on the part of pharmacies, managed well they will provide real opportunities for pharmacies to expand their services and grow revenue.

"The Pharmacy Guild is pushing for a focus on service delivery and professional programs, which is great because it allows pharmacists to differentiate their services. People now come to us for services such as dose administration aids and speciality services such as home medication reviews," she explains.

Hardwick says "consumers are also now very savvy, they have great expectations of the services a pharmacy provides, which has allowed us to expand into areas such as weight loss consultation and asthma advice, which means pharmacists can focus on the professional services side of the business."

handing over the reins

Hardwick acknowledges one of the key challenges for the pharmacy sector is appropriately managing succession planning. She says "with higher priced pharmacies and more rigid financing requirements, it's very difficult for young people to get finance to purchase a pharmacy."

"It's also hard for young people to get into a network of business owners; in this industry it's often not what but who you know when it comes to finding a good business to buy."

"Pharmacy business brokers decide who in their network gets a first look at a pharmacy that's up for sale, so unless a younger pharmacist has a strong alliance with a broker, the best way for them to buy a pharmacy is through a partnership," says Hardwick.

Hardwick believes a solution to the succession planning problem is to invite a trusted junior pharmacist to become a partner in the business, in a stepped buyin approach. The junior pharmacist will often work on the pharmacy floor while the senior pharmacist will manage the business and impart their knowledge of the commercial side of the operation.

"You might offer a junior pharmacist the opportunity to purchase say 10 percent of the business," says Hardwick. Although this does deliver new blood to the pharmacy, a downside is that the existing partners will usually have to guarantee the junior partner's investment, unless the junior partner has independent means, which is unusual.

But for this approach to be successful, it's essential the new partners and the old partners share a common vision for the business, as well as a common work ethic. Otherwise conflicts will arise over the future direction of the business.

There must also be formal policies and consistent processes in the business. This will allow business performance to be measured and will ensure the same quality of service is delivered as ownership of the business is gradually transferred to the new partners.

If these policies are followed, succession planning should be a successful, smooth process, which delivers value to both the new and old partners in the business.

the future of pharmacy is in systematisation

Systematisation will revolutionise the pharmacy sector in the coming years, says veteran pharmacist Bill Scott. Scott has been a pharmacist for 40 years and is on the board of directors of drug company Sigma Pharmaceutical Group and is the chairman of two pharmaceutical IT companies, Fred Health and HealthLink. Scott has also been the president of the Pharmacists' Guild in Victoria.

"Pharmacists need to become more IT literate, from improving point of sale systems to introducing better electronic ordering processes in their business," explains Scott, who says most pharmacists are already automating processes in their businesses, and for most pharmacies, introducing new procedures and systems will be a process of continual refinement rather than a massive leap.

"Electronic prescriptions will become more widely used over time,"

says Scott

who believes many pharmacies will also start using software programs such as Mirixa. This software systematises health delivery systems using pharmacists' knowledge of medicines in a co-ordinated, systematic way. Scott says the new focus on IT won't just be about "quality of care; it will also be about ensuring your people are organised and focused on the business."

transfer of ownership

When it comes to succession planning, Scott says one way to successfully transfer ownership is to sell a practice to more than one pharmacist. "No one individual can manage a pharmacy, especially if it's a relatively young person. The idea is to invite two or three buyers into the business because it's a lot of responsibility for just one person," he says.

Says Scott: "a young person can't buy a business and turn up and on day one and run it, even if they are a trained pharmacist. They need to spend time learning the business, so you need to bring a couple of younger partners into the business and assist them to get started."

According to Scott, younger partners need time to "understand parts of the trade other than helping people with their prescriptions. So the idea is for the senior partner to slowly cut down their work, maintaining an interest in the business for five years and training someone during that time, mentoring them and assisting them to go outside the business to get training if necessary."

This approach works so well, says Scott, because 'the young person knows they will eventually be the owner of the business and it also gives the older person confidence they will be able to get out of the business in time."

pioneer of the pharmacy franchise

Terry White, a pioneer of the pharmacy franchise model, makes an excellent point about one of the genuinely unique features of the pharmacy industry. "Pharmacies are one of the most essential components of the health system. Where else can you walk in off the street and get advice from a professional at no charge?" he says.

It's a point of difference the pharmacy industry can use to its advantage, as it navigates new challenges in the market such as increasing competition from supermarkets and the rise in the number of discount barn pharmacies.

According to White, in the face of these threats, "pharmacies are going to need to focus on developing scale, increasing efficiencies and improving and extending value added services to meet new challenges head on. The credibility of the pharmacist's white coat means the community has a very high level of trust in our industry, which gives pharmacy an edge when competing with supermarkets and discounters-I don't believe you can build a sustainable business on price alone. Pharmacies that differentiate themselves by offering a good service have a great future," he says.

White says the new market entrants are putting pressure on margins and, in addition to competitive pressures, the industry is also facing the fallout from the economic downturn.

"People are always price sensitive, but especially at the moment. There is anecdotal evidence people are not getting all their prescriptions dispensed," says White

For example elderly patients might get three or four regular prescriptions, but at the moment are asking which one they can do without. There's also a level of non-compliance as people have one prescription filled, but don't get repeats filled.

These trends, as well as the large number of pharmacies located in increasingly popular shopping centre complexes, are putting pressure on high street pharmacies. "Especially in Sydney, but also in other capital cities, traditional pharmacies are finding the streets are not as busy and there's no car parking for customers," he says.

White, whose business has just acquired Pharmacy Direct, which sells pharmacy products online, acknowledges the importance online sales will have for pharmacies in the future. "We bought the business to have a facility to build an online business model; you can't be a serious player in the future in online pharmacy unless you establish the foundations now," he says.

new model

White came to terms with the new pressures on the pharmacy sector some years ago, one of the reasons he developed his franchise model. There are now 150 Terry White pharmacies around the country, generating annual sales of $900 million.

By becoming a Terry White franchise, a pharmacist gets the benefit of a store layout that is proven to generate sales, increased buying power and IT support. "We have a great record in helping pharmacies get a better return on capital and a better gross margin than operating as an independent," says White.

Succession planning is still, however, an issue for a franchised pharmacy and White says the best approach is to "bring people into the business and organise a start for them, organising an orderly transfer of ownership from the older to the younger generation."

"We're involved in 10 pharmacies across Australia and we have young managers and partners that usually start with five or 10 percent of the business; we've taken literally dozens of people to full ownership and have a staged process of buying up and selling down a pharmacy," he says.

Although White cautions against a perception pharmacies are recession-proof, he is buoyant about the future potential of the sector. "People who work hard and run their store efficiently will continue to do well," he says.

This report is designed to shine a light on the current position of practices in the pharmacy sector in Australia.

Most of the data contained in this report was prepared by Access Economics in 2008, which was commissioned by NAB Health to:

• Estimate the value in dollars and as a share of GDP of the healthcare industry as a whole compared with 30 years ago and projected forward 30 years.

Estimate the contribution to the current value from: general practitioners, six types of medical subgroups, dentists, veterinarians and pharmacists.

• Estimate the current number of people and full-time equivalent people by gender in the workforces of GPs, medical specialists, dentists, veterinarians and pharmacists.
• Estimate changes in average income by gender in the workforce.

Data was also obtained through interviews with three pharmacists:

• Nicole Hardwick
• Bill Scott
• Terry White

Many thanks to Nicole, Bill and Terry for agreeing to be part of this report.

more information

For more information speak with your NAB Health financial specialist or contact:

• Craig Anderson, Managing Partner Victoria
  +61(0)3 9630 9405 or Craig.A.Anderson@nab.com.au
• James Carter, Managing Partner New South Wales
  +61(0)2 9433 1922 or James.M.Carter@nab.com.au
• David Backhurst, Managing Partner Queensland
  +61(0)7 3234 5205 or David.J.Backhurst@nab.com.au
• Les Ryan, Managing Partner South Australia
  +61(0)8 8291 3440 or Les.J.Ryan@nab.com.au
• Mike Beckingham, Managing Partner Western Australia
  +61(0)8 9214 6534 or Mike.P.Beckingham@nab.com.au

visit nab.com.au/health

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