Thursday, March 07, 2013

Drugstore Sales Drop Along with Drug Trend: Implications for Retail Pharmacy

In yesterday’s Insights from the 2012 Express Scripts Drug Trend Report, I highlight the fact that 2012 spending on traditional drugs dropped for the first time on record.

Last year marked a similar milestone for retail drugstores. For the first time, revenues at U.S pharmacies and drugstores declined on a year-over-year basis. See the chart below.

Given the superior profitability of new generics, retail pharmacies’ top-line pain is being offset with bottom-line joy. But when generic launches slow down in 2016, the pharmacy industry's traditional dispensing profits will be hit hard. Drugstores must either embrace the low-cost generic revolution or figure out how to penetrate the specialty market. Otherwise, they'll find it hard to climb out of the rabbit hole.

GO ASK ALICE

NAICS (North American Industry Classification System) is the standard used by federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. Pharmacies and drugstores are classified in NAICS 446110.

The U.S. Census Bureau’s Monthly Retail Trade Report collects and reports monthly sales data for the retail trade NAICS sectors (44-45). These government-collected data provide the most complete picture of revenues at all store-based retail drugstores, not just the larger public companies. Note that these data exclude non-pharmacy retail formats (supermarkets and mass merchants) and mail pharmacies but include retail revenues from non-prescription front-end sales.

I aggregated the monthly data (not seasonally adjusted) into calendar quarters and computed the year-over-year change in total revenues.

DOWN, DOWN, DOWN

The chart below shows the sales decline at pharmacies and drugstores. I added a linear time trend (R-squared = 70%). In 2011, revenue growth started slowing. In the second-quarter of 2012, year-over-year growth became negative.


The substitution of generic drugs for brand-name drugs is the biggest factor behind pharmacies’ revenue slowdown. Just compare the revenue chart above to the traditional medications drug trend.

Since new generics keep launching, everything looks OK. As I show in Pharmacy Profits Over the Generic Life Cycle: Explaining the NARP-NADAC Data, older generics have lower prescription profits than newly-launched generics.

A VERY IMPORTANT DATE

Older generics are less profitable. The most widely-dispensed generic drugs already have average prescription prices below $10. There are only so many gross profit dollars that can be extracted when prescription prices get so low.

Some innovative pharmacies are embracing the low-cost generic revolution by emphasizing cash-pay prescriptions. Check out retail independent pharmacy Marley Drug, run by PBM critic (and occassional Drug Channels commenter) Dave Marley. Under its Extended Supply Generic Program, Marley Drug offers a 12-month generic medication supply for $70. Health Warehouse, a mail pharmacy, is playing a similar game.

Specialty at retail is the next step. To compete for the business of dispensing specialty drugs with limited networks, retail pharmacies are trying many approaches to develop the requisite services and technology infrastructure. See the “Capturing the Specialty Opportunity” (starting on page 125) in the 2012-13 Economic Report on Retail, Mail, and Specialty Pharmacies for more.

In 2016, the generic wave crashes. If retail pharmacies don’t prepare today, they’ll find themselves late for this very important date.

3 comments:

  1. What about increased revenues/profits from the “front end” to get out of the rabbit hole?

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  2. I don't think they can sell enough shampoo, candy, and cigarettes to make up for the lost Rx profit...

    ReplyDelete
  3. To what extent do you feel that modified reimbursement formulas with realistic dispensing fees and less reliance on margins over drug cost will protect pharmacies? With a higher guaranteed payment, regardless of FUL, MAC, and shrinking cost, pharmacy has a better future. Pharmacists here in Iowa have been complaining of FULs below the new AAAC, but in the longer term a realistic dispensing fee seems to be a better reimbursement formula.

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