The market for pharmaceutical products has the inherent need for a higher-than-usual regulation regarding prescription drugs essential to meet the medical needs arising from several medical conditions. While there is the need to protect the developers of the drug wishing to collect the return on their investment, there is a major concern with consumer welfare in this market due to the aforementioned importance of a fairly wide range of drugs. The scope of this regulation, however, needs to be further extended beyond the pharmaceutical companies [the manufacturers] and fall on local pharmacies [the distributors/retailers], due to the importance of drug dispense to outpatients.
The Portuguese pharmacy market has had a history of low competition regulation and ownership restrictions when setting up new pharmacies, which made the drug dispensing business a fairly profitable one. However, it has been visible that over the last decade that restraints aiming at protecting the drug market profits have been gradually removed to ensure fair competition and higher consumer welfare. From this pool, three restraints can be said to have been eliminated: the exclusive ownership of pharmacies by pharmacists, the exclusive distribution of non-prescription drugs, and the territorial exclusivity of pharmacies.
Up until recently, the ownership of Portuguese pharmacies followed some rules that dated back to the decades where the apothecaries served as manufacturers and retailers. Hence, only licensed pharmacists were allowed to own pharmacies. This changed in 2007, when the liberalization of pharmacies allowed the latter facilities to be owned by commercial parties other than pharmacists [Decree-Law nº 307/2007]. The efficiency gains are indeed easy to see: not only does it aim at decreasing the market concentration, it may also allow the business to be run by proficient parties with more developed management skills. Setting up a pharmacy becomes accessible to a broader number of agents, which promotes entry, and management can be more efficient, which is welfare enhancing on its own.
Another measure aiming at promoting competition and increasing consumer welfare was the 2005 law [Decree-Law n.º 134/2005] establishing the conditions for the sale of non-prescription drugs outside pharmacies. The aim was to create stronger competition for this sort of product, promoting entry of new competitors, which is prone to result in lower prices for the final consumers (taking also into account that stores selling those products will also compete amongst themselves).
Finally, exclusive territorial business practice had been one of the major profit drivers in the pharmacy sector. With exclusive territories, pharmacies were allowed some freedom in price setting and had the ability to attain higher margins. This ability, however, has been cut short over the last decade, with the minimum distance between pharmacies being shortened from 2 kilometers to 350 meters [Portaria n.º 352/2012]. In a simpler way, this means that there can be now two pharmacies in a small street – should we multiply that by the amount of streets in a somewhat large town and the consequent fragmentation of the market is clear. Alongside with increased price competition, making territorial boundaries less binding avoids welfare decreasing market concentration and some consequent market dominance that may arise.
At a first glance, however, the effect of the three practices combined is somewhat ambiguous. There has been some convergence in the prices of non-prescription drugs both in pharmacies and other stores (namely parapharmacies) towards a lower level, as well as an increase in the number of such stores, which signals a competitive improvement in the drug market. On the other hand, there has been no significant variation in the number of inhabitants per pharmacy [Source: INE/PORDATA], indicating that competition may have not been normalized through this channel. All in all, it is still too soon to see the long-run effects of these policies and further investigation will be needed in the future.