For a few years, there has been talk about the central pharmacy model being adopted across Europe. Central pharmacy refers to a centralized facility which fills prescription orders for multiple retail stores. One can think of central pharmacies as distribution facilities which perform the same duties as a retail pharmacy like verifying prescriptions, filling, and reporting data in accordance to law. The model brings value to the retail pharmacy in several ways. On a basic level, it allows for the outsourcing of labor to the central pharmacy. More importantly, it helps pharmacies control the cost of holding inventory of slow moving, expensive drugs. Certain medications are held in small quantities at a pharmacy and having these small quantities in stock often represents a significant cost burden. This burden can be spread across multiple retail stores by utilizing a central pharmacy. Since inventory can be held in bulk at a central pharmacy, the cost per pill is lower, bringing savings to the individual retail stores that the central pharmacy serves.
This model has been present across the US for years. However, there has been limited adoption in Europe due to legislative restrictions in most countries. There are exceptions. The Netherlands and many Nordic countries have central dispensing facilities in place, however most major European countries still do not allow dispensing of this type. Many countries in Europe have drafted legislation to change this, leading to a rush of investment in hopes of having an early shot at this new market if and when the legislation passes. The UK, one of the countries at the center of this topic, passed legislation through parliament in February of this year which gave the greenlight for third-parties to fill prescriptions. The passage of this law has opened an entirely new market for automation vendors and we expect more to follow, with legislation currently being deliberated in many countries.
Our Expectation of Growth Within Central Pharmacies
Through 2024, we are forecasting sales of automated dispensing machinery to central pharmacies in EMEA to grow at a CAGR of 17.1%. It is important to note that we were intentionally conservative in this forecast given the uncertainty around the timing of various legislative changes. If there is rapid passage of legislation which legalizes the third-party filling of prescriptions, we expect this CAGR to be significantly higher. Our forecast for sales of dispensing machinery to central fill facilities in EMEA is shown below:
In this growth scenario, revenues from machine sales to central pharmacies are growing from ~$30mn in 2020 to $65mn by 2024.
It is important to point out that within central fill facilities, automated dispensing machines are only one part of the system. Due to the high quantities of pharmaceuticals flowing through these facilities, high volume sortation and picking automation occurs before the medicine ever reaches the automated dispensing machine to have the prescription filled. The automated dispensing machines are often the last stop before the filled prescriptions are shipped to the retail pharmacy, with a massive automation system existing before the prescription filling process. Given this, revenues of adjacent systems sold to central pharmacies could easily be 10x the value of revenue associated with automated dispensing machine sales. This is why companies like Knapp, an automation systems provider operating primarily in logistics, has acquired Apostore, a producer of automated dispensing machines. Using the competencies of both companies, a compelling solution for central pharmacies is created.
The Ceiling in This Subsection of the Market Is Very High
In a report published in 2015 by the Pharmaceutical Group of the European Union (PGEU), the top five countries in the EU by count of pharmacy were France, Spain, Germany, Italy, and the UK. The number of pharmacies amongst these five countries totaled around 97,000 according to the report. Let’s assume that one central fill facility could serve 20 retail pharmacies and that 25% of retail pharmacies were utilizing central filling. If this were the case, between these five countries there would be 1,213 central fill facilities. Assuming further that each of these facilities has just two automated dispensing machines, the market size would be nearly $450mn (average selling price of 185k per machine) just for the automated dispensing machines being sold to this user-type. While this is a rough calculation, it serves to illustrate the potential of this sector to drive revenues of the businesses serving it.
Central Fill Could Offer More Value in a European Market
An estimate in a study conducted by the Pharmaceutical Care Management Association found that 63% of pharmacies within the US were operated by chains in 2019. When chains engage in centralized filling of prescriptions, by and large they are operating their own central pharmacies. Because the majority of pharmacies in the US are operated by chains, the value proposition of central fill is fundamentally different than that of a central fill serving multiple independent retailers. Chains still benefit from the spreading inventory costs over its stores; however they will not benefit from the outsourcing of labor and will still endure the capital expenditure associated with the equipment.
In Europe, where the overwhelming majority of pharmacies are independently owned, central pharmacies will follow more closely to a model known as central fill as a service. This model implies that one entity fills the prescriptions for multiple different entities and charges the for the cost of filling a prescription plus a fee. Under this model, value around outsourcing labor and forgoing capex expenditures are retained. In our opinion, the distinction between these two pharmaceutical landscapes is important and points to Europe having more of a case for broader central pharmacy adoption than the US.
Within Europe, central pharmacies represent a huge opportunity not only for suppliers of medication dispensing equipment, but also for logistics automation solution providers. In terms of automating the supply chain of pharmaceuticals, we have barely scratched the surface today. Automation within this vertical is just beginning to scale and the emerging central pharmacy trend could be a great opportunity to get a foothold in a market with a very high ceiling.
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