What direction of transformation will be chosen by the Ukrainian pharmaceutical market - peer review of Farm ROST

What direction of transformation will be chosen by the Ukrainian pharmaceutical market - peer review of Farm  ROST
Modern science examines two major transformations, when analyzing market processes: the evolutionary and revolutionary. Any market changes - is the reaction of market participants to changes in business conditions, in the behavior of market participants, and require adequate decisions from the all market players in response.
 

We made analyzing of the dynamics of market events of the industry and we believe that the Ukrainian pharmaceutical market is transformed by evolutionary way. In this case, the rate of transformation of the Ukrainian pharmaceutical market is significantly higher than transformation of similar markets of the developed countries. 

The high pace of transformation is caused by the following conditions: the Ukrainian market is dropped behind the pharmaceutical markets of developed countries, the openness of the market, high level of market competition, high level of competence and professionalism of the owners and managers of pharmaceutical companies, the introduction of international best practices, technologies, system-defined personnel training.

There are key success factors of this stage of market development:

1. The correctness of market processes assessment and compliance with the competitive strategies of market participants of the current market situation.

2. Speed of response, including the adaptation of business model.

3. Costs leadership, which are ensure the ability of businesses to sustain price competition and, as a natural consequence, getting the higher net profit due to lower operating costs by the business of.

4. The presence of an adequate amount of equity capital and access to cheap debt capital.

These key success factors will allow continuing the organic growth to major market participants but small companies, with increasing of market concentration, will be forced to consolidate alliances, or leave the market.

Two major trends will dominate in the current decade, according to our peer review. The first trend - it is a horizontal consolidation. This consolidation comes to the final stage in the distribution sector.

Prediction is confirmed by data that the 87% of the market size were controlled by TOP - 5 distributors in 2011.

Process of pharmacy network consolidation will be continuing actively in the segment of pharmaceutical retail. For example, the TOP-100 companies (about 6,000, or 30% of outlets), are displaying an annual exponential growth, controlling 59% of pharmacy sales. 

There are no national leaders, who control over 10% of the pharmaceutical retail market on Ukraine, at the end of 2011. But such companies have already been successfully operated and grown at the regional level. 

The second trend will be the beginning of a process of vertical consolidation of the pharmaceutical market. There may be two scenarios. The first - consolidation “top down”, which means the output of distributor to the retail market and is the most popular scenario of development in the pharmaceutical markets in developed countries.

For example, many Western retailers, with its own pharmacy network, suggest variety of partner programs for other retailers.

This consolidation has been implemented in the Baltic countries, where majority of distributors, had to merge with pharmacies and pharmacy chains rapidly, when a threat of losing access to the “pharmacy shelf”, as a key element of the channel to promote products to the ultimate purchaser, appeared.

In Poland, for example, the largest distributor of PGF has realized the integration of top down, through the partnership program with independent pharmacy chains and independent pharmacies under the name “DoZ” (“Caring for the health”). Meanwhile, Polish company began to develop its own retail pharmacy project, which is implemented not only in Poland but also in a number of European countries.

The PGF company announced its plans of entering the Ukrainian market by buying format networks. As Alexey Yaroshenko, head of the regional service company “Proxima Research”, noted during the international pharmaceutical forum “WORLD PHARMACIES – 2011” : “... the competition shifts towards pharmacy chains, which are becoming active participants of the Promotional process ...”. This is one more confirmation of the forecast of competition growth for access to the «pharmacy shelf».

What direction of transformation will be chosen by the Ukrainian pharmaceutical market - peer review of Farm  ROST
Projects of vertical integration of “top down” are realized by distributors at specially created umbrella brand
of a specific project, including the sale of the franchise, if it is allowed on the legislative level or the preservation of existing brands of pharmacies. Often, instead of buying a franchise, a pharmacy is committed to purchase a certain percentage of products range of distributors, but in such projects, the relationship between the distributor and the pharmacy are based on the position of “win-win” (“the winner-winner”).

According to our observation, in most cases, the projects are implemented under the umbrella brand. 

Pharmacies receive substantial benefits from marketing economies of scale in such projects, high-quality IT-solutions, significantly reduces the reserves on the shelves, because the distributor provides the services of “distribution center”, and to have their own distribution center can allow themselves only large network operators. 

If we additionally take into account that pharmacies have access to a wider range of products, for example, in Poland, pharmacies that participate in project of  “DoZ” have access to range of products up to 32,000 SKU, and the possibility of obtaining goods from the warehouse of distributor 2 times a day , including the shortest time of delivery of “C” and “D” goods category , which is ensured by a unified information system of accounting of inventory, such as pharmacy chain Alliance Boots, the advantages of this integration are more than obvious. 

Single platform of distance trade is implemented by distributors, which is very effective for large-scale projects. This transformation can be accelerated or slowed down due to market conditions, government regulations, but such kind of transformation will take place in the domestic market sooner or later.
What direction of transformation will be chosen by the Ukrainian pharmaceutical market - peer review of Farm  ROST

The second type of vertical consolidation can be developed according to the scenario of “bottom up”.
In this case, the pharmacy network with a substantial market share will increase their operational efficiency and reduce costs through creation of distribution centers with subsequent transformation of these centers into the distribution companies. In the Baltic states, Norway there are examples of such consolidation. In those countries, pharmacy chain or independent pharmacy chain Alliance chose this model. But such consolidation does not become widespread due to various factors.

“The consolidation of the Ukrainian market has begun on the script “top down”. 

Therefore, it is advisable for the owners of pharmaceutical and distributional businesses, to analyze competitive strategies of own businesses regularly in order to verify of its effectiveness and to correct it   at current market realities, - says Igor Vovkodav, the director of “Company “Farm-ROST”. - It is advisable to work out new strategies by the staff in their companies or with consultants for pharmacy networks, pharmacies and distributors, who don’t see strategic opportunities to maintain and increase the operating profitability and scale of business.  Implementation of strategies by the pharmaceutical market participants, who don’t correspond to market realities, may result in a substantial financial loss and loss of business in the highly competitive environment.

There are many instances on the market, where pharmacies were sold at a price of real estate, and the distributors had difficulties with the return of accounts receivable from these pharmacies.”

Thus, in the process of consolidation of the pharmaceutical market, we expect an increase in the volume of transactions buying and selling of pharmaceutical businesses, increasing the number of alliances with distributors and pharmacies, increasing the number of consulting projects for pharmaceutical retail operators.

 

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