The last week of October has unfolded at a pace that has been difficult to keep up with as press reports began to emerge that Mayne was in serious discussion with Priceline, Woolworths, and others, and that Priceline was also looking to procure a major pharmacy software company.
Unofficial reports indicated that the PGA was near to panic as the various stories unfolded.
Indeed, the articles I prepared last month were vindicated almost totally, as the hostile forces to pharmacy gathered as if following a prepared script from the pages of this e-magazine..

"Mayne has no financial or operational necessity to enter into any sale arrangements for any of its divisions, however these discussions will allow Mayne to determine if a sale of the pharmacy services business will benefit shareholders."

This was also the statement made to the Australian Stock Exchange.

Speculation between pharmacists privately also mounted, with e-mails running hot in what must have been one of the biggest information sharing exercises ever in pharmacy.

So what is going on?

If we take the above Mayne statement at face value, then all that is happening is that a number of organisations are discussing formal bid proposals for certain assets of Mayne (Faulding distribution), Priceline and Woolworths included.
This a valid exercise to determine the demand for an asset and what the market will bear.
It does not represent that a sale is imminent, because Mayne will inevitably continue try to talk up its value (hopefully I will not be proved wrong before this edition is published).

Which of the above two companies is more likely to value the Mayne asset at a higher level?

In reality Priceline is the front runner, because it just wants to buy market share with brands that it can easily integrate within its Clicks/Priceline banner.
It will be prepared to toss in a high bid.
The bid is rumoured to be in the vicinity of A$400 million against a book value of A$380 million, which will give the ultimate buyer access to 36 percent of the Australian pharmacy market.
Woolworths, on the other hand, already has its market share in the now 150-200 pharmacists that have registered interest in becoming associated as a Woolworths pharmacy.
Woolworths would see disadvantage in the antiquated supply chain process that exists in Mayne, (even worse in the other wholesalers), and would prefer to graft a pharmacy distribution process to its existing model.
This would eventuate only when there was a critical mass of committed pharmacies already trading.
Woolworths would not necessarily see it as a good business tactic to buy Mayne, because it would have to totally rebuild the supply chain process--and this would be expensive.
The other factor is that while Woolworths is a tough competitor, businesswise and politically, it does not relish the thought at this particular moment, of a damaging dogfight at a time when its own sales base has lost momentum, and shareholder value needs to be preserved

Which of the above two poses the least threat to established pharmacy?

Priceline fits this bill nicely.
If they were to buy Mayne, they would become very highly geared, and this poses a potential risk to their ability to develop and expand, particularly as they will be faced with immediate increases in competition, both for market share and for pharmacist supporters.
There may be major pharmacist defection in the event of a sale, but those tied to bank guarantees would have limited movement.
Herein lies one PGA strategy to dislodge the intruder--help to develop financial packages with an independent financier (or even one of the other wholesalers) to facilitate a rapid retreat.
Priceline has a small market share of retail business (compared to Woolworths) and has less influence with the Australian government.
I really cannot see that there will be a marked difference in pharmacy affairs with a Priceline entrant, only that individual pharmacist control of their market is partially weakened, and through them, PGA power base is also weakened.
Priceline is already sounding out a leading pharmacy software company with the obvious thought of having a seamless supply chain system working back from pharmacy POS systems.
There is about a six percent price differential (savings on overheads) available should Priceline be successful in developing their supply chain to an optimum level, and already the thought of this occurring is stimulating Sigma and API to look at gateway systems and other competitve IT systems.
This type of competition between wholesalers can only benefit pharmacy as a whole, and with a shake up of the supply system, retail pharmacy will be able to emerge in a more competitive format, even if it stays in its "cottage garden" state (only for the short term however).
In any event, Priceline has a current base of seven pharmacies, and with or without a Mayne acquisition had planned to extend this number to 20 in 2004, also to rebadge them as "Clicks" pharmacies to align with its South African presentation, where there has been a recent integration of 83 pharmacies into their group.

Woolworths is the threat that needs to be monitored closely.

If Woolworths wanted to inflict maximum damage, then a Mayne purchase would achieve that in one hit, giving Woolworths access to retail brands, product brands and manufacturing capacity, and instant market share.
This would sharply reduce PGA ability to mount a defensive or an offensive strategy, because the fox is already in the chicken coop.
By inserting its own supply chain technology, it could arrive at that six percent price differential with a minimum time delay.
This would immediately drive the remaining two wholesalers into negotiation with Coles, Boots or some other offshore global pharmacy group.
Coles would be the most likely, but they are playing a "wait and see" game, allowing Woolworths to make the waves, draw the flack, and when things settle down, will quietly and methodically develop an alternative offer to Woolworths.
The fact that Woolworths may have an initial lead-time would not deflect them from this strategy.
They did the same with petrol and emerged with a strong model that had Woolworths revisiting their own version for a tidy up.

So will Woolworths enter the end game at this stage?

My bet is that they are just testing the water, and will bide their time and work to their prepared business plan.

Will Mayne sell to Priceline?

Well, if they want maximum price for their asset, they will not sell just now.
They will attempt to repair their supply chain system, and after re-engineering, offer themselves for sale.

Who would they want to sell out to?

Why Woolworths of course, having now achieved a compatible distribution system and added value to their asset.
If the above is played out, then the PGA will be given some respite and will be able to draw breath. Provided they start some genuine strategic moves and begin what they should have been doing years ago, pharmacy has a chance to trump the intruders.

Have the PGA got the capacity to think things through, and then implement processes that may turn a segment of their members against them?

Now is the time to sell a new strategy, while the spectre of a range of predators persists.
Let us hope this will happen and that the PGA will recognise that they need to be drawing in strategists from around Australia, to think out the short term and the more important longer term, and then set up teams to work through the objectives identified.

There is a lot of work to be done.

I am only speculating on all these issues, and Mayne may simply follow their established process of selling off divisions that give a return on invested capital of less than 9.5 percent (Faulding distribution returns about 7.3 percent currently).
The lure is that supply chain reform, already demonstrated by Woolworths can increase return on invested capital quite dramatically.
You only have to do the hard licks first.
If an immediate sell-off is mooted, Priceline is the winner, and what we get in pharmacy is an efficient competitor who will stir all to action.
They will have a substantial spread of pharmacies across Australia, and their market profile with consumers will take a quantum leap.

Being the lesser of the two evils, pharmacy will absorb this challenge and become better for it.
It will only become a problem if pharmacy leadership does not take the hard decisions (yet they are not that hard in reality).
Currently, John Bronger is contrasting Australian pharmacy with the American model, and playing up the social role of Australian pharmacists. This is the traditional mindset, but there is a place somewhere between the traditional and the more rational.
Pharmacy is a big business and will be measured as such, but we do not deliver optimum value for our own business asset (compared to other big businesses), or for our main customer (government), or ultimately the consumer.
The social value that John Bronger talks about is valid and is an intangible valued by consumers, but this value has to be in balance with total health costs.
Whichever way you look at it, pharmacy has to produce a value for money business delivery structure that can be compared favourably to the rest of the field. Whether we like it or not, this is reality, and we become increasingly vulnerable as health costs escalate globally and we become an obvious target, both for government and big business.
Restructure of pharmacy business needs to begin immediately, starting with a restructure of the PGA itself.
A refocused PGA could be a bit like a shop refit, with the result being a burst of creativity and increased activity and efficiency.

On a final note there is a possibility that being so highly geared, and having a tough political competitor in the PGA, Priceline may falter down the track.
This again may be fanciful speculation, but it is a possibility, and if I had a wholesaler guarantee under Priceline control, I may want to re-think that proposition to the most stable environment.
Hence a Guild focus on pharmacy financing would help to maintain its strength.