Thursday, March 22, 2007

AMP's Impact on Pharmacy Profits

Fred’s is a general merchandiser that operates 683 stores and 283 pharmacies in 15 states throughout the Southeast. Pharmacy is about one-third of its $1.8 billion in revenues.

Why should you care about Fred’s?

Because Fred’s included the following statement in its 2007 earnings guidance: “The impact from the federally approved Average Manufacturer's Price (AMP) program is expected to become effective on June 1, reducing Fred's 2007 gross profit by approximately $4.0 million.

As far as I know, this is the first hard dollar estimate of AMP's profit impact. (Cool!) I did a few quick calculations based on their overall earnings estimates and FY2006 results. I won’t bore you with the math, but the company is forecasting that the first 8 months of AMP will:

  • Reduce pharmacy gross profit dollars by 3.6 percent
  • Reduce pharmacy gross margin by one percentage point, i.e., 100 basis points

Ouch! While Fred’s faces some unique challenges (Katrina, TennCare cuts, etc.), we have a credible estimate of AMP’s potential profit impact on a publicly traded retail pharmacy. Neither CVS nor Walgreens have provided a similar level of precision to date.

Now you know why the AMP Battle Rages On. But unlike Mountain Dew's AMP, I somehow doubt that pharmacies will feel a boost of energy on June 1 from CMS' AMP.

1 comment:

  1. AnonymousJuly 15, 2007

    The change to AMP is going to put the majority of independent pharmacies out of business. The government better ponder the effect this change will have on rural communities throughout the country. These communities will not have pharmacies.