Thursday, June 12, 2014

Once Again, Gov't Data Show Rising Drugstore Industry Profits

As a follow up to yesterday’s analysis of Profits in the 2014 Fortune 500, let’s check out the U.S. Census Bureau’s latest Annual Retail Trade Report. These government-collected data provide the most complete industry picture of profits at retail drugstores.

As you can see in the charts below, drugstores’ gross margins increased again, reaching their highest levels in seven years. Gross profit dollars also grew.

Every year Drug Channels publishes these data, I get comments that “the sky is falling for pharmacy,” “next year will show how bad things really are,” yadda yadda yadda. Yet these impartial government data repeatedly show that retail drugstores’ financial position looks better than you may expect.


Gross profit equals a pharmacy’s revenues minus the costs of products (net of discounts and returns) bought from a manufacturer or a wholesaler. Gross margin expresses gross profit as a percentage of revenues.

The drugstore industry’s overall average gross margin, as reported by the U.S. Census Bureau, has remained fairly stable throughout the past 20 years, averaging 25.3%. In 2012 (the most recent year available), drugstore gross margins were 24.2%, which is the highest they have been since 2006.

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  • The overall stability is consistent with pharmacy owner surveys showing that overall gross profit margins for independent drugstores have remained stable—ranging from 22% to 24% over the past 10 years. See Profits Rebound for Pharmacy Owners.
  • Public company retail drugstore gross margins are higher, averaging 28% to 30%. These public chain figures include higher gross margin front-end products and reflect slightly better drug acquisition costs.
  • The chart above shows a trend break in 2006. Gross margins averaged 25.9% from 1993 through 2006, and averaged about 23.7% from 2007 through 2012. I attribute this one-time decline to (1) the launch of such retail discount generic programs as Walmart’s $4 program, (2) retail price competition for mail business (per the 2013 Pharmacy Market Analysis: Chains Up, Mail Down, (3) Medicare Part D’s launch, which shifted seniors from higher-profit cash-pay prescriptions to lower profit, third-party-paid prescriptions.
Although gross margin has remained stable, total gross profit dollars continue to increase, along with total drugstores revenues. In 2012, total drugstore gross profits were $55.8 billion, up $1.2 billion (+2.1%) vs. 2011. Since 2000, drugstore’s gross profits have increased by $22.4 billion.

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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 reports gross profit and margin data annually as part of the Annual Retail Trade Report.

A few comments:
  • The charts above do not show prescription gross margins. The Census drugstore data include retail revenues and gross profits from both prescription and non-prescription products. Chain drugstores such as CVS' retail business (NYSE: CVS) and Walgreens (NYSE: WAG) generate about one-third of their revenues from non-prescription, front-end items. Independent drugstores, meanwhile, generate less than 10% of their revenues from non-prescription sales.
  • NAICS 446110 excludes non-drugstore retail outlets (supermarkets and mass merchants) and mail pharmacies.
  • The Census Bureau defines gross profit to be "Sales minus Purchases," i.e., cost of goods. This definition may not correspond precisely to definitions used in public company accounting reports, although I believe it's close.
For a primer on pharmacy profits, see Chapter 7 of the 2013-14 Economic Report on Retail, Mail, and Specialty Pharmacies.


  1. Adam, as always nice post. One thing I sometimes sit back and chuckle (or sob) about is generic acquisition cost inflation for some of the "extremely mature" generics. In many cases you can triangulate a rationale (severe drop in manufacturers willing to produce, shortage, etc.,), but I begin to wonder if some of what we are seeing reflects the win-win dynamic of the new-ish wholesaler-pharmacy partnerships (e.g., CVS-Cardinal, WAG-ABC, and such)... or perhaps it's paranoia taking hold...

  2. Adam -

    You seem to be emphasizing GROSS profit, which is really just a paper figure, and does not reflect reality. What about expenses? Negative reimbursements? Wouldnt NET profit be a more accurate statement?

  3. 1. The Census Bureau only reports gross profit, not net profit.

    2. Net profit can be manipulated more easily. See Profits Rebound for Pharmacy Owners for my discussion of how pharmacy owners can spend gross profit dollars.

  4. Just to be clear, you are lumping independent pharmacies with the chains, right? Why don't you report on "mail order" vs "chains (Walmart-Walgreens-CVS) vs "Independents". I would think this would be more usable information if you truly wanted to educate the masses and want somebody to form an accurate opinion on your topic. Full disclosure: I am an Independent. We don't buy at the same prices the chains buy and we also don't receive the same reimbursement for the same service as the chains.

  5. Just think how much those gross profits would've risen if pharmacies were being paid over their acquisition cost as much as the PBM's paid them below their acquisition cost! Think of all the other local business they could support if they were being paid fairly on everything!

  6. The Census Bureau's annual report only has data on drugstores as a group. There's more detail in the quinquennial Economic Census.

    For a high-level comparison of chains vs. independents, see Profits in the 2014 Fortune 500: Manufacturers vs. Wholesalers, PBMs, and Pharmacies or my 2013–14 Economic Report on Retail, Mail, and Specialty Pharmacies.

  7. Typical government report. Tons of data but zero real useful information. Gross revenues and gross profits, without corresponding expense figures, are just data points that tell you nothing about the overall health of an industry.

    Lots of companies in bankruptcy court have nice gross numbers.

  8. Pharmacy is different. Here's what I noted in Profits Rebound for Pharmacy Owners

    "According to the NCPA’s counting, the total number of independent community pharmacies has remained roughly stable: 23,064 in 2010; 23,106 in 2011; and 23,029 in 2012. The appeal of ownership clearly hasn't dimmed. Note that NCPA’s figures are higher than those from other third-party sources.

    These data may be surprising, given that the NCPA Digest insists on presenting how many pharmacies “operate at a loss.” In 2012, the Digest claims 24.3% of pharmacies were operating at a loss, compared with 23.6% in 2011, 23.0% in 2010, 21.0% in 2009, etc.

    If you understand the components of gross profit above, you'll see why the loss figures are completely bogus. A net loss may simply mean that the owner drew a salary and bonus that pushed the business’s net profit figure into an accounting loss. As the data above demonstrate, the profit story for pharmacy owners remains good."

  9. Pharmacy is different? Maybe small independents can manipulate their expense that way but the public companies (WAG, CVS, RAD, etc) can't. They have GAAP and shareholders to answer to.

    What I'm saying (and you're not) is that looking ONLY at gross numbers can be very misleading. So what if my gross profit is going up 2.1% if my expenses are gong up 4.2%.

    You don't get to take home gross profit...unless you want to end up in court (bankruptcy, civil, or criminal).

  10. Are you saying a pharmacy owner shouldn't draw a salary so that the pharmacy SHOWS a POSITIVE net profit? We have eat too...the PBMs seem to think nothing of ROBBING us ('legally') of our livelihoods while their CEOs fly in private lear jets or something...look at George Paz $51 million...

  11. Gross profit - Earnings Before Expenses (EBE). Of course, it only tells part of the story.

    Somehow, more than 1 in 5 pharmacies "lose money," each and every year, for years and years. Yet, there is no massive wave of bankruptcies. Puzzling? Not really.

  12. Not at all. I'm simply pointing out that gross margins appear to be stable. Thus, a pharmacy with $4 million in revenues has a bit less than $1 million in gross profit dollars to spend on operating expenses and the owner's salary.

    If ownership isn't profitable enough for you, then don't forget that employed pharmacists earn about $120,000 per year. See For 2013, Pharmacist Salaries Rise Yet Again For This Family-Friendly Occupation.

  13. Adam- are you aware that there is no longer a shortage, and in fact, a glut of pharmacist now that wages have decreased by about 20%, and that those that were paying that to those of us fortunate to have been licensed and working received, while the newbies are 'forced' to take the lower wages. Many pharmacists CANT find jobs now (so easily).

    Also, with the PBMs doing what they are doing, that revenue is decreasing while other expenses rise (generic acquisition costs inclusive without concomitant reimbursement adjustments). With these negative reimbursements, that eats generously into that 25% 'profit' on paper. It still doesn't reflect reality as was mentioned about 'take-home' dollars.

  14. Time will tell. In the meantime, please see my comments in the third paragraph of the opening.

    FYI, generic acquisition costs are not part of operating expenses: Gross Profit = Revenues minus Cost of Goods Sold

    I suggest you check out Norman Carroll's useful book Financial Management for Pharmacists.

  15. If we sold electronics like BestBuy or general goods like Walmart , we'd also be making between 20-26% Gross profit. That's NOT exceptional by any means. Further, they aren't waiting 25-35 days to collect 90% of their revenue to restock their stores (as we do with Insurance companies continuing to pay with increasing latency despite PROMPT pay acts in various states) Pharmacy's Gross profit averages of 21-24% over the course of the last 5 years are right in line with other RETAIL. (and it's incredibly rare for someone to DIE because Best Buy gave them the incorrect TV.) Your continued attempts to marginalize Pharmacy and particularly INDEPENDENT Pharmacists are tired, off base, petty and seem to be motivated by some OUTSIDE influences. In summary, you are an EMPTY vessel who is nothing more than a SHILL for PBM's and manufacturers.

  16. I'm mystified by your hostile attitude. I'm not a shill for anyone. And I never said that pharmacy profits were too high (or too low). I'm simply reporting on some interesting Census data that most people overlook.

    Here's some food for thought from John Adams, our second president: "Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence."

  17. Your most recent stance against "Any Willing Provider" for Medicare Part D is a great example of your ANTI -Independent Pharmacy posturing. Your argument that "Any Willing Provider" removes the incentive of the preferred CHAIN Pharmacy from participating in a network and therefore COSTS will rise is complete and utter NONSENSE. ..Currently, INDEPENDENTS do NOT even get the opportunity to participate in the MAJORITY of preferred Medicare Part D plans by virtue of us simply not being offered a contract. When the contract is offered, there is ZERO negotiating, it's take it or leave it so we would be getting paid the EXACT SAME RATE THAT THE PREFERRED CHAIN PHARMACY WOULD. ( Another bullet hole in your failed argument) The PBMs are currently excluding over 20,000+ providers of Pharmacies services by virtue of COLLUDING with Chain stores. So if CVS won't sign a PREFERRED network contract with Catamaran because I am allowed access to it and I DO accept the reimbursement terms, so be it, that's their FREE MARKET CHOICE. Independents don't get that luxury of operating in a FREE MARKET.
    The fact of the matter is the scenario that I mentioned above NEVER plays out because the "GAME" is skewed so much in favor of the special interests (the PBMs and Chain stores). You wrote of facts being "dubious things", here's a FACT for you: Preferred networks within Medicare Part D are the funneling of MY TAX DOLLARS to compete DIRECTLY AGAINST MY BUSINESS and it's all at the behest of lobbyists from the PBMs and Chain drug stores. It's as Anti-competitive and UNAMERICAN as it gets and you sanctifying this practice via this blog is shameful. .---

  18. Black helicopters are on the way. Please put on your tinfoil hat.

    Just because you’re paranoid, doesn't mean the pod people aren't after you...


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