THE COUNTDOWN PHARMACY DECISION

When I first saw the headlines about the community pharmacy group’s victory in its case against the licensing, by DHBs, of joint venture-owned pharmacies within Countdown supermarkets, it took me back several decades.  Studying Economics at university, the pharmacy licensing regime under the Medicines Act 1981 was characterised by one lecturer, who liked a touch of drama, as a protection racket.  At the time, I recall that the lecturer thought it had good company with other statutory regimes such as those affecting the way we obtained (medical) diagnostic services. 

As a result, I have watched various attempts to change the (retail) pharmacy landscape with interest.  Most recently, this has seen the opening of the Big Aussie brand in Queen Street – closely followed by the closure of some CBD pharmacies.  In a related thread, up until this month, anyone in the CBD who was in need of a blood test would have needed access to a car because, for two years post-COVID-19, the CBD has been without an outlet (re-branded collection centres).  

Based on the media coverage, I was also curious about the reported treatment of the concept of ‘control’ by the Court.  At first glance, it seemed to be out of step with similar threshold tests – such as those found in the Takeovers Code or the Commerce Act. 

On closer inspection, the High Court decision is narrow question of statutory interpretation – which the judge said wasn’t straightforward.  The decision concludes that the licences granted to the JV vehicle (49% owned by Countdown) failed to meet the requirements for licensing in the Medicines Act.

Because the decision will have significant impact on the JV pharmacies and other pharmacy operators, the effect of the decision has been deferred for a short period to enable the owners of the JV pharmacy and the Ministry of Health to determine appropriate next steps.

Background

The Medicines Act sets out a list of requirements for licensing of pharmacies – that must be met by the operator in order to be granted a licence.  Importantly, section 55D of the Medicines Act contains two limbs, requiring that a company may be granted a licence to operate a pharmacy if:

• (at all times) more than 50% of its share capital is owned by pharmacists; and
• ‘effective control’ of the company is vested in those pharmacists.

A group of community pharmacy owners brought judicial review proceedings to challenge the issue licences for two Countdown pharmacies owned by the JV vehicle.

Importantly, the ownership and governance structure of the JV vehicle was:

• 51% of the shares are held by three pharmacists – with the remaining 49% being held by a wholly-owned subsidiary of Woolworths New Zealand Ltd (which owns the Countdown chain); and
• governance of the JV vehicle was determined by a Shareholders’ Agreement and the constitution which provided that:
  • the Board of the JV vehicle was limited to two directors – one appointed by the pharmacists and the other by Countdown; and
  • Board decisions must be unanimous.

Central to the community pharmacy group’s case was its argument that the Health Ministry, when granting a pharmacy licence to the JV vehicle, wrongly interpreted section 55D by accepting that ‘effective control’ by the pharmacist majority shareholders only required them to have negative control (a veto power).  And that the governance of the JV vehicle did not provide the pharmacist majority shareholders with ‘effective control’ because Board decisions had to be unanimous – which effectively granted Countdown a power of veto.

In short, the argument was effectively the mirror image of the (Health Ministry) decision-making process that had decided that the pharmacist majority shareholders had negative control (and therefore ‘effective control’) because they controlled the day-to-day operation of the pharmacy and could veto any resolution by Countdown.

High Court

The High Court held that section 55D required ‘effective control’ of the JV vehicle itself, not merely the pharmacy business or its day-to-day operations.

The judge accepted that the ‘effective control’ was added to the legislation to ensure that the control, by means of a minimum shareholding requirement, could not be circumvented.  That is, to ensure that the company was there to serve independent pharmacists and not some outside interest and thus to protect public safety.  (More on this below).

The judge continued by adding that the case law and commentary illustrated is that various factors can be relevant to determining ‘effective control’ of a company (shareholding, Board appointment rights, day-to-day management and Board and shareholder control over decision- making) but the Court must look at the “real” picture.  And while negative control (veto rights) may be sufficient in other legislative contexts, where the aim is to prevent some mischief from having control, as opposed to not having it – those contexts are fundamentally different from the Medicines Act.  It is aimed at preventing mischief associated with a lack of pharmacist control.

But, to get there, the decision makes comparisons with the proceeds of crime regime.  Respectfully, I think that comparison is a stretch.  The licensing regime for pharmacists as part of an array of quality and other legislative controls designed to protect the public.  For obvious reasons – the proceeds of crime regime fills a void.

However, the judge rejected the idea that ‘effective control’ is concerned primarily with operational management.  While other provisions of the Medicines Act reinforce the public safety requirements of the Act, section 55D imposes an additional requirement – by requiring effective control of the company, not just the pharmacy or its day-today operations.  And that pharmacist control over the bare minimum obligations does not satisfy the requirement for effective control.

Here the judgment makes the point (presumably to points made in submissions) that many of the active decisions required to be made at Board (and not operational) level can have an impact on the health and safety of a pharmacy’s patients.  But this is followed by a comment that many independent community pharmacists provide optional services for the safety and well-being of the public (such as COVID care).  And then the judgment adds a sort of rhetorical question about opening hours – and whether changes to “normal pharmacy opening hours” might be vetoed at Board level because they impact on profitability. 

There must be a laundry list of countervailing arguments here.  Most of them are economic.  If Parliament had intended the licensing regime as a means of ensuring that individual pharmacists backfilled the gaps in our health system – then surely it would have said so?

Where I think the judge is on stronger ground is the statement that, by requiring ‘effective control’ by pharmacists, there must not be ‘effective control’ by non-pharmacists.  Pharmacist control cannot be jointly held with non-pharmacists – because shared control is not ‘effective control’ as required by section 55D. 

Final thoughts

This decision will have knock-on impacts affecting not only the JV pharmacies – but also other pharmacy ownership vehicles.  It has some potential to affect businesses in other regulated sectors. 

Those parts of the decision identifying the policy issue at stake as being that of safeguarding the public safety – may also have some form of crossover into the realm of professional ethics. 

There is no question about the skills and training of pharmacists and their front-line role in the delivery of health services in often trying circumstances.  Likewise, there can be little doubt about the public-spiritedness of many individual pharmacists. 

But these views will count for little if pharmacies go broke and the services disappear from broad swathes of the community.  As is the pattern for a number of other elements of the heath sector, particularly in rural and remote communities.

There is no need for elaborate due diligence.  A quick glance around the floor of a typical pharmacy while you wait to have a prescription filled will tell you everything you need to know.  In many locations, in order to cover the spiralling costs of rent and payroll, the pharmacist is forced to stock a range of other things in order to make ends meet.  At a glance, this doesn’t seem sustainable. 

I have my doubts about the decision as a matter of statutory interpretation. 

On a policy level, the argument that wider ownership will necessarily lead to a drop in safety standards is open to criticism – in a highly-regulated industry where the professionals are subject to specialist training (5 years) and a range of regulatory and professional obligations.  To do so would require you to ignore the rest of the private healthcare sector. 

Of course, every pharmacy must have a registered pharmacist overseeing the day-today management of its core role – that of dispensing prescriptions.  But, in an increasingly tech-focused healthcare system, private capital is likely to be required to meet the capital costs associated with new technology and drive innovation.  Specsavers anyone? 

Also at a macro level, whilst I don’t detect a layer of profitability akin to that in some other areas in the spotlight, the changes heralded by the arrival of the big Aussie brand are telling.  And they have prompted a competitive response.  In urban centres – the customer is likely to be better off.  Whether those benefits are universal is unknown.  But it seems an odd result that allows the march of the big Aussie brand – but would protect that big Australian from international competition from (say) Boots.  I hope someone at the Commerce Commission is minded to have a quiet word to the Health Ministry about the need for a re-think of the policy settings.

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