How Does the Ban on Marketing Discounts Change the Pharmacy Market? Interview with the CEO of “Pharmacy of Low Prices”

From March 1, new rules for regulating the pharmaceutical market came into force in Ukraine. As part of this, marketing agreements, which for decades have been an important element of interaction between pharmacy chains and manufacturers, were completely banned.

The official goal of such changes is to reduce the cost of medicines and ensure transparent pricing. However, in practice, representatives of the pharmaceutical market are sounding the alarm, because the ban on marketing agreements may lead to the closure of pharmacies, especially in small towns and villages, as well as an increase in prices for a number of drugs. 

How these changes have affected the market and what representatives of the pharmacy business think about it – in an exclusive interview with UNN, CEO of “ANC” Mykola Shcherbyna told.

–  What are marketing agreements in the pharmaceutical business? How did they work and why were they concluded by pharmacies?

These are agreements for the provision of marketing services to promote the manufacturer’s product in pharmacies. This may include the correct display of goods in the window, placement of advertising materials in the pharmacy, participation in discount promotions for customers, provision of information on the sales rate of the manufacturer’s products, its share in the sales of the network, etc.

Participation in marketing activities is exclusively the initiative of the manufacturer, who wants to increase sales of his product. The manufacturer applies to the pharmacy, agrees on the terms and concludes an agreement.

– What were the marketing payments used for (discounts for people, social programs, staff training, etc.)? 

Marketing payments accounted for 40–50% of all gross income received by the pharmacy, so they were an integral part of the unit economics, which allowed to compensate for the constantly growing costs of rent, salaries, utilities, and administrative expenses.

In addition, within the framework of the provision of marketing services, so-called transit discounts were provided, which were provided by the manufacturer and broadcast by the pharmacy to stimulate demand.

– How did marketing payments affect the price of medicines in your pharmacies?

In conditions of fierce price competition, the availability of income from marketing allowed for more aggressive dumping, providing users with the best price.

In conditions where some manufacturers have increased the selling price of medicines by up to 120% over the past three years, the availability of marketing has minimized the impact of this increase on users.

The amount of marketing payments could vary depending on sales volumes, but it is clear that even in small pharmacies it was an important part of income, the ban of which significantly complicated or even made it impossible to continue operations.

– Marketing agreements are now prohibited. Have you already felt the changes? Has this affected the prices of medicines or their availability (i.e. assortment) in pharmacies? How exactly?

This is a very serious blow to the financial stability of pharmacies. Despite the fact that in the eyes of many users pharmacies were considered a highly profitable type of business, the real profitability of pharmacies even in the best of times never exceeded 3–4%.

And the opening of new pharmacies was almost the only possible way to get a financial result from the activity due to economies of scale. Today, according to a study conducted by APAU, the average return on sales, subject to the abolition of marketing revenues and unchanged costs, is negative.

According to our calculations, in the new model, pharmacies with a turnover of up to UAH 800,000 are unprofitable. That is why these changes will primarily negatively affect small businesses and pharmacies in small towns and villages, where revenue has always been much lower than in large cities (the average turnover of a rural pharmacy is UAH 500–600 thousand).

In order to compensate for losses, pharmacies will be forced to increase prices for drugs within the permitted maximum margins. Therefore, for most drugs (which are not included in the TOP 100, for which the price has been reduced by 30%), the price will not decrease, but, most likely, will increase.

We, as a large network, will do everything possible to refrain from raising prices and offer the best prices to our consumers, because this is part of our business model. But smaller pharmacies will be forced to increase prices to compensate for losses.

– Speaking with representatives of the pharmaceutical market, we have heard the opinion that marketing agreements still need regulation, but exclusively according to EU standards. Do you agree with this, or how exactly do you think marketing agreements should work, or are you satisfied without them?

I am an advocate of the approach when the competitive market itself is the best regulator. Today, none of the market players has crossed the market share threshold even at 18%, the number of economically active population is falling every year, so the market is over-competitive. This is a real “bloody ocean”, and prices and the level of service for consumers in Ukrainian pharmacies are much better than in European pharmacies (this is confirmed by real research, unlike the populist accusations of some politicians).

But in the context of a complete ban on marketing revenues, we are open to initiatives to regulate and participate in the development of new rules of the game together with the Ministry of Health.

– Some drug manufacturers in interviews with the media say that marketing payments are a way for pharmacies to “earn” on drugs. Is this really the case? Do you agree with this thesis?

If the opportunity not to work at a loss is a way to earn, then yes, that’s true. No business can work with negative profitability in the long term, so the resumption of marketing services is critical to prevent the closure of pharmacies, staff reductions, tax reductions and, most importantly, to avoid worsening access to medicines for customers.

– Is it true that marketing payments supported competition between small pharmacies and large networks? Did this help to avoid monopolization of the market?

Marketing payments have always been only a source of covering losses and a guarantee of the survival of pharmacies. Ambition and perseverance of all players in the market, who are not ready to give way to their competitors, help to avoid monopolization to a greater extent.

Let’s add

Thus, it can be concluded that the ban on marketing agreements can radically change the pharmacy market of Ukraine, depriving pharmacies of a significant part of their income, which, in turn, may lead to their closure, especially in small towns and villages.

Marketing payments were an important mechanism for supporting the pharmacy infrastructure: they allowed to cover operating costs, expand the range of medicines, conduct social initiatives and staff training. In addition, thanks to marketing agreements, patients received discounts on a number of medicines, which made them more accessible.

The absence of these mechanisms leads to an increase in prices for a significant number of drugs, which will especially painfully hit consumers with low incomes. At the same time, the profitability of the pharmacy business is sharply reduced, which threatens the existence of small pharmacies.

Thus, the question is the need to regulate marketing agreements and find a balanced approach that will preserve competition, access to medicines for patients and the financial viability of pharmacy chains.

Let us remind 

President Volodymyr Zelenskyy last week stated that it is necessary to make a decision to reduce drug prices.

The pharmacy business supported the President’s statement and the public union “Pharmacy Professional Association of Ukraine” sent to the Ministry of Health of Ukraine a Declaration of Interaction on Reducing the Cost of Medicines, which has already been signed by a number of large pharmacy chains.

It stipulates the following obligations of all market participants:

• National manufacturers of medicines reduce selling prices for their products by a certain percentage compared to prices as of January 1, 2025.
• Distributors proportionally reduce wholesale prices to the manufacturer, which will affect the entire logistics network.
• Pharmacies, for their part, reduce retail prices for medicines, ensuring that the end consumer has a real reduction in the cost of drugs, that is, they apply a discount to their margin proportional to the manufacturer’s discount.

However, on February 10, Zelenskyy announced that drug prices in Ukraine are absolutely inadequate and announced a meeting of the National Security and Defense Council on price reduction. Already on February 12, following the meeting, Zelenskyy announced that there is a way to reduce the price of the top 100 medical products from March 1 by 30% – for the most important medicines for Ukrainians. 

On February 13, the President enacted the NSDC decision on reducing the cost of 100 medical products by 30%. Other drugs should become cheaper by 20%.