Tuesday, December 15, 2009

Shhhh! Owning a Pharmacy is Very Profitable

You may not believe it, but independent pharmacy owners are doing financially quite well, averaging almost $300K in personal income in 2008.

This surprising fact comes from the Executive Summary of the 2009 NCPA Digest Sponsored by Cardinal Health. Click here for the NCPA's public Digest page.

Need further proof that times are good? The NCPA has marked the full financial results as “TOP SECRET.” So much for transparency!

I don’t begrudge the right of business owners to earn a profit. But perhaps pharmacy owners should tone down the woe-is-us rhetoric and stop blaming everyone else—the government, PBMs, drugmakers, third-party insurance, cylons, sunspots, whomever—for (supposedly) “low” profit levels.

SURPRISINGLY PRETTY PROFITS

Two quick definitions just to make sure we are all on the same page:
  • Gross Profit equals the spread between a pharmacy’s revenues and the cost of goods (COGS) sold to generate those revenues. Gross profit measures the portion of revenues available to cover operating expenses and profit. Think of GP as Earnings Before Expenses (EBE).

  • Gross Margin expresses the spread (Gross Profit) as a percentage of revenues.
Now consider this interesting factoid from the Digest summary: Profits at independent pharmacies have not been declining over time. Yes, really.
  • In 2008, pharmacy gross margins were 23.2% of revenues—equal to 2007’s margins. (See Table 1.)

  • Despite what you may have heard, gross margins for independent pharmacies have remained in a relatively stable range from 22% 24% since at least 1999.
Average revenues per pharmacy location were $3.9 million in 2008, up 7.7% versus 2007. (See Figure 1.) Since gross margins remained stable, gross profits per pharmacy were also up by 7.7% to $900,000 per pharmacy.

You can read more about pharmacy margins in my pharmacy industry report.

PHARMACY OWNER ECONOMICS

Given the above figures, I estimate that a pharmacy owner got roughly one-third of these gross profits—almost $300,000 in 2008—as discretionary income. Congrats!

Here’s my math.

A pharmacy’s gross profit gets spent in three primary ways:
  • Non-Owner Operating Expenses: Everything you need to operate the pharmacy—payroll, rent, licenses, insurance—except the salary and benefits of the owner.

  • Owner Compensation: Salary and benefits of the working pharmacy owner

  • Net Operating Income: The so-called “bottom line”
This is a zero-sum formula. Increasing one part will decrease another. For example, increasing Owner Compensation will decrease Net Operating Income. Keep this simple mathematical relationship in mind when reading pharmacy-sponsored studies about “low profits”.

The NCPA Digest reports the sum of Owner Compensation and Net Operating Income as Owner's Discretionary Profit (ODP). Unfortunately, the current figure is not reported by NCPA in the 2009 Digest available to non-members, so I can’t share it with you on the blog. More on this need for secrecy below.

Based on previous studies, ODP typically ranges from 7% to 8% of revenues, i.e., roughly one-third of gross margins of 22% to 24%. Sources: See my comments below this 2008 Drug Channels post or the reports available in the AMCP’s fine resource library.

Yes, I know YMMV such as the case of Parker Drug. (Hat tip to NCPA's blog.) But last time I checked, the plural of anecdote was not data.

TRANSPARENCY: GOOD FOR THEE, BUT NOT FOR ME

As I state above, I have no conceptual problem with the fact that a small business owner can be handsomely rewarded. It’s one of the things that makes this country great. Whether pharmacy owners make too much money…well, that’s a more complicated question. Just ask Wal-Mart.

So why does NCPA now hide the financial data from the Digest’s surveys? NCPA once made the average financial results available for purchase by non-members, but no longer. In fact, members now get confronted with some scary-looking legalese when downloading the For Your Eyes Only financial data:
The information on this website and contained in the downloadable Adobe Acrobat files (pdfs) regarding the 2009 NCPA Digest, sponsored by Cardinal Health financials contains confidential or legally privileged information is intended solely for the use of active NCPA members. Distributing or otherwise disseminating or copying is strictly prohibited. NCPA members are welcome to use the information regarding the operation of their own business, but taking any other action based on the contents is also strictly prohibited. Any unauthorized use of the contents is illegal.
Yikes!

John Norton at NCPA provided me with the following explanation of why the Digest's aggregated industry averages are no longer available to non-members:
"NCPA is dedicated to advancing independent community pharmacy now and in the future through effective advocacy and resources for our members. As an association, our ability to achieve that mission hinges in part on the strength of our membership. We seek to attract and retain good members by offering tangible, exclusive, and useful benefits. The Digest is the only annual, industry-wide, comprehensive survey of community pharmacies. Members are able to compare their pharmacies with the industry trends, which is a helpful tool for any business owner trying to be successful in the competitive pharmacy marketplace."
'nuff said.

---

CAN I INTEREST YOU IN HANUKKAH?

On a totally unrelated note, I neglected to mention the kickoff to the Festival of Lights last Friday. Turn off Adam Sandler and listen instead to Stephen Colbert and Jon Stewart sing “Can I Interest you in Hanukkah?,” my current holiday favorite.



24 comments:

  1. Very interesting posting! Who knew! I should have gone to pharmacy school. Is it too late? Loved the video, too. All the best to you and yours during the holiday season!

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  2. I have "The plural of anecdote is data? -- Adam Fein, 5/28/19" written on a Post-It on my wall. Glad to see that little truism back in today's post!

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  3. Clearly somewhat of a shocker.

    I'd suggest you delve into the detail to find out what % of the independent pharmacies are in a small market with little to no competition vs a mid to large metro area.

    It's clear to say that independent pharmacy is the norm in rural small town America, while the big boys control the communities in population centers greater than 10,000.

    Would really love to see the results of such a study....and I'd bet it would read something like this:

    Analysis: Move to a small town, live the good life as a pharmacist, handle the local LTC/nursing home for pharmacy services, know your patients well, work 50 hours per week when the store is open. (Work another 20 hours/wk when the store is closed).

    Risks: High stress levels, standard dose of generic Xanax....which can buy for 4 bucks at the WalMart 15 miles away. See your kids on Christmas and Thanksgiving.

    Rewards: You too can early $289,500 per year.

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  4. Since no one else has said it yet -- very funny song! I'm sending the link to my whole family right now.

    In case anyone wants it:
    http://www.colbertnation.com/the-colbert-report-videos/211033/november-23-2008/a-colbert-christmas--jon-stewart

    (Click teh Share button at the bottom.)

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  5. Just to be clear: The plural of anecdote is *not* data.

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  6. The digest is a valuable tool for pharmacy owners but is not an accurate reflection of the 23,000 independents pharmacy operators. The data for the digest is collected only from those pharmacies that voluntarily send their financials to the digest. These owners by human nature tend to be the more successful, you always tout your success rarely your failures. This year the digest did not report on the number of pharmacies that submitted data, in years past the numbers submitting have been less than one thousand owners.
    Conclusion: Digest valuable tool but not a reflection of 23,000 independent pharmacy owners rather a reflection of 1,000 very successful pharmacy owners
    Jim ApproRx

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  7. Jim,

    You are correct--the NCPA data come from a self-selected sample. NCPA does not release information on samples size or provide confidence intervals around the point estimates in the Digest.

    Given the potential public scrutiny of the NCPA data, one could imagine that NCPA respondents might try to make their profit data look *worse* than reality.

    Nonetheless, I notice that the U.S. Census Bureau reports that Gross Margin as a Percent of Sales for NAICS 44611 (Pharmacies and Drug Stores) was 24.4% in 2007, which is actually higher than the NCPA data. The 1999-2007 average was 25.5%, which is also higher than the NCPA average. See the Census' Annual Retail Trade Survey.

    Adam

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  8. You must be scared to post my comments, you have not posted the last two. I'm sure you don't want to bite the pbm's hand. I could close my pharmacy today and go to work for a chain, increasing my wages and benefits by 25-30%. 300,000 what a joke. Lets talk Pbm's, I just filled 3 prescriptions for a member of a union that is self-insured (they hire the pbm to process claims, the pbm assumes no risk). The members of this plan have a flat 20% copay, patient's copay total for 3 rx's was 37.80, pharmacy total reimbursed price was 110.36. 37.80 is 20% of 189.00, so the "spread" on those scripts was 78.64. Which is over double the pharmacy's margin. That is what the pbm's do, and it will end when the truth gets out.

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  9. If you're a regular reader, then you should know that I approve all comments regardless of perspective.

    If you don't believe or like the data, then you should complain to NCPA, not me. I'm just reporting the facts.

    Adam

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  10. Checked out link you noted above………….. could not confirm your % margin number for independent pharmacies …….but even if correct at ~ 25%, my stores run at 20.5%, I would still dispute the $300,000 number. Our distribution network of ~ 2,000 independents, almost entirely rural, only average a volume of ~ 2.1 million in sales. Thus the best gross margins would be 525K using your numbers or 430K using mine………. both numbers make it very hard to believe that the average pharmacists owner nets out 300,000 dollars.
    Jim ApproRx

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  11. Jim,

    Try this link: http://www2.census.gov/retail/releases/current/arts/gmper.xls. It will open an excel spreadsheet. See Row 19, NAICS code 44611.

    Adam

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  12. Hi Adam.


    Just one simple comment- To stereotype any sector of the industry into one view is simply dangerous. I know of many pharmacists who are struggling as well as many who are closing their doors or have already done so.

    If things were so good, this wouldn't be happening.

    Yes, just like in any industry, there are highly successful stories to tell. Is it possible that of these independents that are doing well, that their business has a significant specialty pharmacy business in place? I believe this is the case. If so, this represents only a small precentage of the indepedent pharmacy sector.

    Thanks.

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  13. If the average pharmacy turns their inventory 11 times a year no wonder they don't have any cash........

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  14. Well, if that was all I made, I'd probably sell my pharmacy, but we do about $8.5million, so do the math, if I don't make 800k, I am disappointed. And the 20 hour week is killing me too!!

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  15. I own a pharmacy, pretty near average I would imagine, but 'don't make anywhere near 300k. Don't get me wrong - I love what I do but it has more to do with being my own boss that the money. You failed to point out pharmacy reimbursement per prescription has declined every year since 1999. The way we survive is doing more and frankly less and less of us survive every year. I'd love to say I made 300 or even 200k a year but it's just not so.

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  16. Adam,

    Retail pharmacy is like any other business.
    1. location
    2. service
    3. innovation
    4. keep your debt low
    5 lower expenses
    6. watch your inventory
    7. train your employees


    In most instances the the price paid is the same on insurance, so the above are very important.

    It would be interesting to see the under performing pharmacies expense percemtages. Many of these pharmacies are over staffed with family and friends. They have all of their money tied up in inventory and accounts receivable that are seriously past due. etc, etc. Oh, and they don't have any business experience or education. Most pharmacists never took a course in finance or economics in college, yet they are running a multi-million dollar business.

    Adam, the "whoa is me" and the "sky is falling" guys are not the successful businessmen. So, don't lump us all together.

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  17. Excellent point -- perhaps someone should tell your trade association?

    Adam

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  18. Adam,

    It is the American way ! Look at Washington, DC

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  19. What PBM do you work for? PBMs do nothing to add to the health of the patient or healthcare. You are full of BS. I own two stores and don't make 300K. I'm in a rural area, but guess what genius, we get paid the same as thestores in a metro area. If really want to have testosterone check intohow CVS/Caremark and how the 3 month of simvistatin that I sold for $14.10 for CVS/Caremark charged Medicare over $160 for. I assume now that you must work for CVS/Caremark/ BTW how much do you make a year. Have the testosterone to publish that.

    George W. Brookins, RPh
    Lincolnton, NC
    704-735-2556

    PS I hope you have the moxy to publish my post in an unaudited manner. Speaking of audits let me call you the next time I have one. I let you explain how a patient is getting to much insulin.

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  20. George,

    I publish all comments because I'm chock full o' moxy.

    If you don't believe or like the data, then you should complain to NCPA, not me. I'm just reporting the facts.

    Adam

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  21. Can an independent pharmacy survive off compounding alone? I've heard gross margins of 90%; thus 20 compounds/day=200k annual gross profit +/-10% Cash/Credit only too, thanks.

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  22. AnonymousMay 17, 2010

    Adam:

    There seem to be several debatable points to your post:

    1. Aren't both re-imbursement and acquisition costs (ie revenue and COGs) tied to some industry benchmark, eg AWP - x%? In which case the fact that gross margin has remained within the same tight range over 10 years is a non-factor, since its just a reflection of the pricing model.

    2. In your analysis, are pharmacy labor costs included as part of COGS? They should be since it is part of delivering the service. However, most pharmacies do not have sophisticated task based accounting, and count all labor costs as operating expenses. This skews the Gross Margin findings -- are the Gross Margin numbers really as rosy as you might describe?

    Pharmacies contend that dispense fees do not adequately compensate for services rendered (ie FFS). Pharmacy profits derive from (and are tied to) buy-sell spread. In this scenario, if the industry switches to more generics, then isn't the pharmacy doing the same amount of work, while receiving less revenue?

    Until labor costs are properly factored into Gross Margin, it would appear that Net Margin is the true factor rather than Gross Margin.

    Final comment. Please note that corporate pharmacies post their net income results after deducting lofty executive compensation. The executive bears no salary risk, and RiteAid executives take home many pretty pennies even if the company is posting a loss. Are you really begrudging an independent pharmacy owner his/her at-risk take home earnings?

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  23. Re: the most recent comment above

    1. I know. See Drug Prices and Pharmacy Profits.

    2. Pharmacy labor is part of operating expenses, not COGS. See post above.

    Generic profit margins are higher on a % basis (to account for the lower revenue base) and are often higher on a dollar basis, too. Plus, the inventory assets are much cheaper for a given volume of prescriptions, so Return on Assets gets boosted. But yes, generic profits are at risk, which is a long-time theme of the blog and explored at length in my pharmacy industry report.

    Your last paragraph is exactly my point. Independent pharmacy owners are well compensated for ownership risk, a contrast to the crocodile tears shed at congressional hearings.

    I've written negatively about Rite-Aid elsewhere on the blog, so need to grind the ax further.

    Adam

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