With populations declining across all Eastern European countries, the battle for market share is fiercer than ever. Further complicating matters for both producers and sellers is the urge politicians have to regulate and shape the industry. Whether driven by genuine concern about improving the lives of their citizenry or nudged by industry players, policy shapers have delivered a strong dose of change over the last few years.
The appetite for profits is now regulated in all Eastern European countries, albeit with different systems in place. For instance, in Estonia retailers have to deal with as many as eight different mark-up rates, which depend on the purchase price and in addition to being capped proportionally also have a maximum threshold in absolute value. Critics of these limits suggest that spending on research and development will inevitably suffer as a consequence, causing long-term problems. A headache indeed.
The industry received a windfall in Slovakia in 2016 with the Ministry of Health introducing exchange cards for patients. Under the new system, before seeing the specialised doctors patients must visit general practitioners first and be redirected to someone with deeper knowledge of the issue. Guidance of patients and reduction of unnecessary visits was the intended outcome of the change according to the Ministry. However, with general practitioners overwhelmed and waiting rooms full, some patients have decided to turn to OTC products. As a result, the policymakers delivered the self-medication trend a boost that no marketing campaign designed by drug makers could have done.
Likewise, Estonia’s Ministry of Social Affairs shows a serious concern about customer’s financial wellbeing. Since March 2017 pharmacists are obliged to notify consumers of more affordable alternatives to OTC medicines shoppers intended to buy. The law requires pharmacists to offer the cheapest drug containing the active ingredient required. A similar law has been in effect in Lithuania for a few years already, with limited impact on actual purchasing decisions. The consumer health industry is also viewed as a possible source of income as taxes. In Latvia, the idea of increasing value-added tax rate of registered medicines (currently at 12%) has resurfaced and, even though the outcome is not yet clear, the industry is understandably concerned.
Availability of various consumer health products is another area legislators are investigating. Traditionally dominant channels (chemists/pharmacies) are sceptical about consumer health products becoming available in other channels, citing qualified advice and control as the reasons why distribution should be limited to their outlets. However, their grip on the industry seems to be weakening. In Slovakia, products like wound care, adult mouth care or dermatologicals can now be found in parapharmacies and drugstores. Similar developments have already occurred in Lithuania and Poland, with forecourt retailers offering medicinal goods. In the Czech Republic this practice goes back as far as 1998. For a while, the readiness of non-pharmacy personnel to give qualified advice was questioned by consumers, forcing companies to assuage shoppers that staff are required by law to undergo training before stepping behind the counter. The number of non-pharmacy selling points is now almost equal to that of registered pharmacies. A few lessons can be drawn from nearly two decades of experience. One is that initial fears regarding safety can be overcome. Another is that despite bargain-hunting mentality, consumers are ready to splurge for convenience: prices in non-pharmacy outlets are around 10% higher than the price pharmacies charge for identical items, but this does not obviously impede sales of the former. Lastly, limitation on the quantities sold to a single buyer is likely to be introduced in non-pharmacy outlets, just like Poland did in order to address the issue of OTC products being used for production of illegal drugs. In the same vein, only small packages are allowed here and some drugs were switched to RX only.
Economies of scale is something that would normally be prescribed by management consultants to pharmacy chains with high margin pressure. However, this is rarely feasible. In Poland a law was passed in April 2017 which only allows licensed pharmacists to open new outlets. It presupposes that new ventures will be independents and effectively limits further expansion of pharmacy chains. Likewise, growth through merger and acquisition is hardy a solution: the sale of Eurovaistine, Lithuania’s largest chain, was discussed in the media with potential buyers from the Nordics and Central Europe mentioned. However, the sale did not proceed, possibly indicating that highly regulated business is not an attractive option for investors.
Some companies go beyond horizontal integration often seen on global scale. Olainfarm, one of the biggest producers of pharmaceuticals in Latvia, continued acquiring pharmacies in 2017 and with five new outlets added, it now has 67 stores; the company is interested in further acquisitions. Still, this hardly looks like a viable option for companies elsewhere in Eastern and Central Europe. Consolidation of pharmacies is too advanced and by now pharmacy chains are too big of a bite to chew for a single producer.
All of these changes are creating a turbulent and unpredictable business environment. No surprise then that companies are striving to reduce their dependency on the heavily regulated business. For pharmacies, one obvious way to achieve this is to expand their selection of non-regulated products. Beauty and personal care items fit very well here, which is why in countries like Lithuania around half of total revenues are generated by non-medicinal products. Poland and other Eastern European countries are following suit. Revenue streams from services are another lucrative opportunity not to be missed. What started as basic and mostly free health check-ups have developed into more advanced body composition measurements, which in turn lead to nutritional counselling. Another possible way to go is switching the regulatory status of over-the-counter to dietary supplements. Such a move in effect trades consumer trust of medicines for greater flexibility of marketing, including pricing. Strangely, such a strategy is widely used in Poland, but not so in the Baltics, partially due to different legal procedures.
Retailers are also not oblivious to the rise of the internet. However, they face some industry-specific challenges in the virtual world. Consumers rely on the advice of certified pharmacy personnel and the trust is not easy to move online. The largest Czech e-pharmacy Lekarna.cz has launched online chat with pharmacists as a standard service (seven days a week from 8am to 10pm), while Lithuania’s Camelia and Eurovaistine have their pharmacists available for phone calls during standard working hours. Still it will take some time to convince consumers. Internet stores are also used by pharmacy chains to test new products. The introduction of a brand online is simpler in a lot of ways compared to the launch in physical stores; once pharmacies notice an increasing consumer interest, they give it a shot outside the virtual world. Still, internet trade of consumer health accounts for only a tiny share of total sales and is itself just as vulnerable to profound regulatory changes. This means anxiety is something the industry has to learn to live with.