(Bloomberg) — In Chile, a country where free enterprise is almost sacrosanct, a communist mayor is shaking up the system by inspiring local governments to jump into the drugstore business and offer cut-rate prices to a populace that’s grown weary of the big chain pharmacies.
Fifty-eight municipal governments have opened so-called “popular” drugstores in the past year and dozens more will follow suit in the next few months, according to the mayor, Daniel Jadue. Recoleta, the working-class neighborhood in Santiago that Jadue oversees, was the first to open one. Its discounts — reaching as high as 78 percent when compared with the medicines sold by pharmacies controlled by the likes of Walgreens Boots Alliance Inc. and Fomento Economico Mexicano SAB — proved an immediate success. Even local councils in wealthy areas that typically frown upon any state intervention now are adopting the model.
“Drugstores have put their own economic benefits before people’s well-being,” Jadue said. “Our municipal pharmacies are starting to change Chile’s drugstore model.”
Much like the outrage over soaring medicine prices in the U.S., U.K. and China, Chileans have been fuming for years over the perceived abuses of a commercial-drugstore industry dominated by just three companies. A court ruling in 1995 and another in 2012 found that Farmacias Ahumada SA, Farmacias Cruz Verde SA and Salcobrand SA colluded to raise pharmaceutical prices. That price fixing added a heavy burden to families who already face high costs for health care.
Chileans cover 53 percent of their health expenses with insurance contributions and direct payments, according to a report by the Organization for Economic Cooperation and Development, the highest percentage in the 35-member group. The government pays the rest.
The municipal drugstores are a break with tradition in Chile, where free-market economics was enshrined by the so-called Chicago Boys during the dictatorship of Augusto Pinochet. The stores are able to undercut the commercial competition by buying both generic and brand-name pharmaceuticals cheaply from the state health care system and by negotiating directly with pharmaceutical companies. Sales are restricted to people with prescriptions lasting at least six months.
“The system is a success and has triggered a debate about local government solving problems that the state sometimes can’t,” Jadue said.
For now, the stores represent little threat to the big three chains. Farmacias Ahumada is owned by Walgreens, which has global annual sales of $118 billion, while Femsa bought Cruz Verde last year. Salcobrand belongs to the Yarur family of banking magnates. There were a total of 2,955 drugstores in Chile as of December 2014.
Still, the municipal pharmacies could become a thorn in their side, with a third of Chile’s 346 local councils planning to have their own within a year. Ahumada and Salcobrand declined to comment about the impact on their sales.
Level playing field
Cruz Verde welcomed the competition but said in a written reply to questions that there should be a level playing field for pharmacies when they purchase medicines. The company also said smaller, independent neighborhood drugstores may suffer as they tend to be in the same areas as the municipal stores.
Not everyone sees the new drugstores as an unqualified success. By providing low-cost pharmaceuticals, they could deter companies from entering the already highly concentrated drugstore market, said Hugo Caneo, director of the Center for Corporate Governance at the Universidad de Chile.
“Municipal pharmacies are actually municipal companies, and we need to ask ourselves if this is the best solution,” Caneo said. “They could be turning into some sort of barrier of entrance to the Chilean market.”
People lining up at the municipal drugstore in Recoleta took a more simple view.
“Companies make huge profit out of old people’s illnesses,” said one client, German Vergara. “My mother needs lots of medicines, like anyone her age: She can’t walk, she has problems with her knees, her bones, her eyesight and has allergies. Now at least we cover the costs with her pension.”
Behind him in the queue was Maria Cornejo, a 56-year-old who was buying medicines for her parents, glasses for her husband and eye-drops for herself.
“The doctor told me I need to use the drops six times a day, but they cost almost 20,000 pesos ($30) in normal pharmacies and each bottle only lasts a month,” she said. “I ended up using them less times a day so they would last more.” Now, she buys them for 9,000 pesos.
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