EastPharma yesterday issued a profit warning, citing the recent increase in the mandatory discount that generic companies have to pay to the state health insurance fund. This rebate was hiked from 11% to 20.5% on December 18th last year and according to EastPharma, it led to an immediate drop in purchases as wholesalers and retailers tried to get rid of old stock. This should be a temporary phenomenon, but the actual price cut will flow straight through to producers’ profits, as they are too weak to offset it by giving fewer free packs to pharmacists, a practice that is endemic in Turkey.
Apart from pointing to lower revenues in future, EastPharma also highlighted the fact that it is being asked to compensate for the reduction in the value of its stock in the distribution chain by giving rebates to wholesalers and pharmacists. There is nothing particularly unusual in the concept of such shelf stock adjustments, but it does raise the question of just how much inventory is currently sitting in warehouses and on pharmacy shelves. Following even more dramatic price cuts at the start of 2010, the Turkish companies have all been trying to drive volume sales in order to compensate. EastPharma, for instance, managed to raise its overall turnover in the first nine months of 2010 by 2% despite its unit prices being around 15% lower than in 2009. Unlike most of Europe, Turkey is a genuine volume growth market, but it has historically expanded at around 6% pa, not 17%, so either EastPharma is taking market share from some of the other local players or else the amount of stock in the distribution chain is going up. If the latter, the cost of this latest price cut could be a lot higher than investors may think.
Posted on 21st January 2011