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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- I attribute the higher margins to 2012’s newly launched generics. I reviewed pharmacies’ profit from the generic versions of Lipitor and Plavix in December 2012’s Pharmacy Profits Over the Generic Life Cycle: Explaining the NARP-NADAC Data.
- 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.
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DETAILS FOR NERDS
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.