Pharmacy meltdown warning as tax increases bite

Russian pharmacies have been hit by an increase in social tax contributions, with about around 20% pharmacies across the country having been closed down since the start of 2011.

Elena Nevolina, deputy head at Russia’s pharmaceutical guild, says that “the situation in regions is exceptionally sad, as well as in case with state and municipal ones.”

According to the guild, the profitability of regional pharmacies was dramatically down this January, ranging from -0.2% to 1.7% from an average of 1.03% – 2.03% last year.

Tax rise impact on Russian pharmacies
Tax rise impact on Russian pharmacies

Nevolina mostly blames the increased tax burden, with insurance payments rising to 34% from January 1 from 14% last year, which in turn increased the share of insurance expenses in pharmacy sales turnover to 3.57% from 1.37%. This was also coupled by increased utility payments, rent and operating expenses, pharmaceutical guild adds, with average bills falling.

The profitability of Russian pharmacies is not enough to cover a growing tax burden, Nelly Ignatieva, executive head at Russian Association of Pharmacy Chains, told RBC daily.

Alexey Batulin, director at the chain Healthy People, says that there is little chance of his business surviving in Russia.

“The chance to keep afloat for us is to conclude direct contracts with producers, using distributors only in the role of logistics.’

David Melik – Guseinov, head at Cegedim strategic data, told RT that the Russian Government needed to urgently take a special approach to pharmacies to prevent their mass closure.

"If the government does not change the tax rate soon, we'll see a mass closure of pharmacies around the country. Industry experts say that by the beginning of June – just eight weeks away – a third of the country's pharmacies will be closed.

They are in a very difficult situation as the government limits prices for many types of drugs. And pharmacies have to work to the same rules as food retailers, even though they're a completly different style of business… The government doesn't give them any leeway. As for the chains, they're slightly better off than the independent pharmacies. Being a well-known brand, they can get a line of credit or they already have a financial cushion. So for them the situation is critical but not disastrous."