Stay alert for short-line income streams (interview with Paul Forster-Jones)

by Gareth Malson

Parallel import availability in the UK has deteriorated over the past few months, which has put the viability of many short-line wholesaling businesses at risk.

Retail Round-up interviews Paul Forster-Jones, managing director of the Cordia Healthcare Group, about the crisis, its effect on community pharmacies and how the trading relationship between pharmacies and short-liners might develop in the future.

Why is the short-line industry currently under threat?

The main cause of the threat to short-liners is due to the devaluation of the British pound against the euro. Historically, PIs and generics represented 80 to 90 per cent of short-line income; therefore, anything that threatens those two product groups is a threat to short-line businesses.

Within PIs, we have seen a 12 per cent devaluation in currency that, effectively, has meant a 12 per cent price increase for products coming into the UK. That has made a significant proportion of the product range unviable, so there has been a massive reduction in the number of PIs that are available.

As a consequence, to survive, short-liners have had to become more competitive with regards to generics. This has led to a generics price war among short-liners, who have sought to replace their lost PI income by selling more generics.

What are short-liners going to do to survive?

One school of thought is that there is nothing they can do although, in my opinion, that view has been held by full-line wholesalers and pharmaceutical companies. The reality is somewhat different.

I think short-liners will survive for two reasons: first, short-liners are private companies owned by entrepreneurs. These people are creative and will use their entrepreneurial nouse to reinvent their businesses.

They will move away from income streams that do not work into those that do work — even if those income streams are temporary and short-term.

For example, many will, for the next 12 to 18 months, derive significant income from exports until the exchange rate turns. Other possibilities come from supplying surgical products, health and beauty, grey products, and specials products.

What is grey trading?

Grey trading is often confused with parallel importing. Grey-market goods, as with parallel imports, are not illegal, but are sold outside the normal distribution channels by companies that may have no relationship with the product manufacturer.

This trade occurs when the price of an item held by a trader is significantly lower than that sold by the manufacturer. It is not uncommon for grey products to have changed hands several times before reaching the consumer.

Will the PI market recover?

I am confident that the PI market will recover, although the time it takes to recover will depend on further fluctuations in the exchange rate. In January 2009, changes to the Pharmaceutical Price Regulation Scheme in the UK will also have an impact on the ability of European wholesalers to export to the UK.

However, what usually happens after a PPRS reduction is that those wholesalers start to reduce their prices once they realise that their market has gone. I expect there will be a difficult first quarter during 2009 for short-liners with respect to PIs but, from April on, the market will start to recover.

What opportunities will the shift in short-liners’ trading activities present for community pharmacists?

This will present a profit opportunity for pharmacists if they remain active in trying to derive profit through purchasing. Pharmacies could benefit through better buying, since short-liners will probably expand their product range.

There will be short-term opportunities for short-liners in areas such as surgical goods and specials, and particularly for purchasing grey products so, if pharmacy proprietors are alert buyers, there will be a window of opportunity for them.

Proprietors may also set up a trading arrangement with a short-liner. Because of the devaluation of the pound on the international exchange rate, the exportation of medicines from the UK is becoming a viable income source. Therefore, pharmacies could sell ethical products to a short-liner (provided they obtain a wholesale dealer licence [WDL]) in return for generic products.

I expect this practice to become increasingly common and I expect the number of WDLs in the UK, currently numbering approximately 1,600, will grow as short-liners encourage pharmacists to move into this area.

Do pharmacists need to be proactive or will short-liners seek to recruit pharmacists for these extra income activities?

I suspect both. The clever short-liners will drive these new opportunities and seek to protect their own bottom line through any possible means while others will be pessimistic and wait for PPRS to kick in.

As for pharmacists, the opportunities will be available for those who look for them.