IHS Global Insight Perspective | |
Significance | Following a lawsuit filed by the Chilean Competition watchdog in December, leading retail pharmacy chain Farmacias Ahumada has pleaded guilty to allegations of price-fixing between the company and main rivals Cruz Verde and Salcobrand. |
Implications | The confession by Farmacias Ahumada directly implicates the other firms in the scandal. The final conclusion of this case brings important implications for Chile's regulatory framework, particularly with respect to pharmacy operations, which are expected to become more effective and transparent in the near future. |
Outlook | Dasa, Cruz Verde and Salcobrand are expected to re-evaluate their future platform for expansion in Chile, not only to face increasing regulatory exigencies, but also the plummeting performance of the Chilean pharmaceutical market. Consumer and political action against the pharmacy chains could involve lawsuits that could increase the financial payout with respect to this scandal. |
Leading retail pharmacy chain Farmacias Ahumada (FASA) has finally confessed to being part of a drug-price cartel by holding a price-fixing agreement with major rivals Cruz Verde and Salcobrand before the Free Competition Defence Court (FCDC). As reported by La Nacion, the Chilean Competition watchdog (FNE) filed a lawsuit against the companies last December based upon growing suspicions from steep drug price growth throughout these pharmacies (see Chile: 12 December 2008: Chile's Competition Watchdog Accuses Pharmacies of Price Fixing).
The costs of 222 medications were affected by this agreement, which lasted from November 2007 to March 2008. Some of these drugs included contraceptive pills and treatments for chronic diseases such as diabetes.
Fasa Rationalisation
Fasa representatives stated that the agreement emerged as a response to increasing losses resulting from a fierce battle over drug prices between the leading retail pharmacy chains starting in 2005. Executives from the company contacted main competitors, Cruz Verde and Salcobrand, to jointly create a new list of prices for the medications. They also contacted manufacturing laboratories to seek the reduction of purchasing costs. Through the agreement, the companies hoped to recuperate former revenue rates and control the decline in prices within the market.
Punishment: Is it Enough?
Following Fasa's confession, the company reached an extra-judicial agreement with the FNE, agreeing to pay a total of 1,350 Annual Tributary Units valued at US$1 million to the treasury. Furthermore, the company will be required to develop an ethical code guideline to improve its regulatory framework of conduct.
The FNE's final decision has been received with mixed emotions throughout the country. On one side, President Michelle Bachelette has stated that this final outcome reflects Chile's efficient institutional system and the importance of the FNE in protecting customers within the country. On the other side, politicians such as senator Guido Girardi, Senator and presidential candidate Alejandro Navarro, and president of the association of independent pharmacy owners, Raul Alvarez, have expressed their concern over the mild approach the FNE has taken towards this case.
Girardi has mainly addressed the importance of reinstituting penal sanctions to prevent this type of drug cartel action which brought enormous profits to the companies involved, much higher than the administrative fines they need to pay. On its part, Navarro has expressed its concerns for consumers and announced his intentions to seek legal action against the companies to reimburse individuals affected by the rise in prices.
Salcobrand and Cruz Verde
In the meantime Cruz Verde and Salcobrand continue to deny any wrongdoing and firmly reject their involvement with Fasa in any price-fixing agreement (see Chile: 16 March 2009: Chilean Pharmacy Chain Denies Any Wrongdoing in Pricing Medications).
Outlook And Implications
The final outcome of Fasa's legal case reflects the conclusion of a long process of legal battles over drug price-fixing problems in Chile, where this type of issue has become a common topic within the media (see Chile: 20 June 2008: Consumer Watchdog Sernac Sues Chilean Pharmacy Chains Over Drug-Pricing Fiasco and Chile: 30 June 2008: Consumer Group Reports Price Discrepancies Among Leading Chilean Retailers). While the final resolution could fall short of the expectations of politicians and stakeholders within the sector, it will provide a stepping stone for the introduction of stricter regulations and a more effective and transparent pricing system in the country.
This incidence comes at a time where the pharmaceutical market in Chile is suffering from low levels of growth, which could be highly detrimental for retail pharmacies, such as Fasa, Cruz Verde and Salcobrand (see Chile: 13 March 2009: Chilean Pharma Association Announces Mere 0.4% Industry Growth for 2008). As such, these companies are expected to consider re-evaluating their future plans, particularly of using Chile as a platform for expansion into the Latin American region as they will not only face increasing regulatory scrutiny, but also be affected by the plummeting performance of the market.
In the short term, Salcobrand and Cruz Verde are expected to be especially affected by the growing contradiction between Fasa's confession and their statements. Accordingly, bad publicity could become highly detrimental for the company’s image within Chilean society and induce further economic losses in the near future.