Thursday, April 03, 2008

The Myth of Fading Independents

May 27, 2008: Please see IMS Recounts, but Independents Still Growing for important information about the data in this post.
Time to test yourself at the college of pharmacy knowledge!

Q: According to IMS, which of the following pharmacy channels had the fastest rate of growth in 2007?
a. Chain Stores
b. Mail Order
c. Supermarket
d. Independent

Contrary to what you may have heard, the answer is … Independents! In fact, independents grew more than 5 times as fast as chains.

Nope, this is not another April Fool’s joke. I was surprised, too, especially given the heated rhetoric around the “debilitating consequences” of Part D, Wal-Mart’s “predatory pricing,” and the “devastating impacts” of AMP.

Looks like your friendly neighborhood blogger will once again have to be the bearer of … good news???


When IMS released the final 2007 data in March, they noted that the U.S. pharmaceutical market experienced its lowest growth rate since 1961. (See IMS Health Reports U.S. Prescription Sales Grew 3.8 Percent in 2007, to $286.5 Billion.)

However, growth varied by channel. Below is a chart showing the 2007 growth rates for the four major retail pharmacy channels. You can check my math with IMS Health’s 2007 Channel Distribution by U.S. Sales report.

The data come from IMS National Sales Perspectives, which reports sales into each distribution channel tracked by IMS. In other words, the data represent product purchases from wholesalers or manufacturers, not retail pharmacy sales to patients.

As I understand the data, NSP purports to represent sales at invoice pricing, not sales at a list price such as Wholesale Acquisition Cost (WAC). For example, contract pricing, such as a discounts processed via wholesaler chargebacks, should be reflected in the IMS NSP measures of price. However, rebates paid by the manufacturer directly to an insurer or PBM (Pharmacy Benefits Manager) would not be reflected in these data. (A similar principle was embedded in the AMP Final Rule.)


Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Consumers are fueling this trend by consolidating their purchases and shopping at fewer, larger stores. Low prices and self-service ("How can you help you?") now dominate.

onsider the massive consolidation occurring at the top end of the pharmacy market. The biggest six dispensers – CVS Caremark (CVS), Walgreens (WAG), Rite-Aid (RAD), Medco (MHS), Express Scripts (ESRX), and Wal-Mart (WMT) – fill more than half of all scripts today.

Retail pharmacy is now undergoing a similar shakeout that will leave us with fewer, but larger, independents. There are half as many independent pharmacies today as there were 15 years ago. Yet by my calculations, the average independent pharmacy today fills 50% more prescriptions than the average independent 15 years ago.

Meanwhile, the aggregate number of pharmacies has barely budged in the past twenty years because new competitive channels – supermarkets, mail, and mass merchants – have filled the gap. As I pointed out last July, consumers of independent pharmacies still have access to many pharmacies within a reasonable driving distance. Yes, I recognize that patients in some rural communities may have an access issue if their local independent closes. If that’s true, then the solution is targeted support for pharmacies in at-risk markets, not blanket protections for all pharmacies in all markets.

And contrary to the claims of doom, Medicare Part D has been neutral to positive for independents. Re-read January’s Pharmacy Profits & Part D, in which I analyze the relationship between pharmacy size and profitability for independents under Part D. The second comment on this Part D post (apparently from a pharmacist) reads: “What the data is basically saying is that the system is going to weed out the pharmacies that are not running efficiently, or not filling a high enough volume of prescriptions.” 'Fraid so.

Put all of these pieces together and you can understand the surprising resilience of the surviving independents in the IMS data.


One of my consulting advisory clients recently told me that he values my opinions because I’m a “tough, cynical hard-ass.” Believe it or not, I took his comment as a compliment. My job is to tell people the hard facts – even when the news is good!


  1. Well-managed independent pharmacies will always compete effectively, if they assimilate enough RX volume via technicians and technology.

  2. Dr. Fein -- You've done it again! Thanks for another thoughtful and original analysis. I had no idea that IMS showed independents growing faster than everyone else. But I wonder if there is something about the way IMS gathers the data that could be inflating independents. Any ideas?

  3. Adam,

    Forgive me if I'm incorrect, but according to the Channel Distribution report, I don't see how independents increase of 3 billion equates to 5 times the chain growth of 1.5 billion from 06 to 07. I see only twice the growth. ( doesn't 1.5 x 2 = 3?)

    Also, is the report of channel distribution by US sales a summary of pharmacy purchases or pharmacy sales? If it is purchases, could some of the difference in dollars be due to the higher prices independents must pay to purchase due to lack of negotiation power?

    Finally, the same reports you are quoting (2007 Channel Distribution...), show that Chains increase by 18.9 billion from 2003 to 2007 while independents only by 13.7 billion. Wouldn't this be considered the "big picture" that should be considered more than the shortsighted 1 year review?

  4. Marc,

    As always, thanks for the comment.

    Yes, my post is admittedly "short-sighted," but the point is that the results are so contrary to my expectations. Hence, the graphic of the purple gorilla professor.

    Re:your questions
    -- I'm comparing the growth rates 8.4% vs. 1.6%, which is 5.4X.
    -- This is a report of purchases *by* each channel, i.e., sales to each channel by manufacturers or wholesalers.
    -- I calculate comparable growth rates for 2003 to 2007:
    Independents +$6.9B (+22%)
    Chains +$18.9B (+24%)

    I don't think that price issues are large enough to account for the discrepancy. I'm actually more concerned that IMS changed their data categories and did not restate the historical data, but I do not have any quantifiable verification that this occurred.


  5. Adam,

    One swallow does not a summer make, right? The longterm trend has been downward, so it remains to be seen whether this is a one-year blip or something else. Who knows, maybe the Big Three wholesaler programs for independents are having an effect. At, we also noted that scrip volume as reported by IMS Health went up for food stores even though dollar volume went down--which would seem to point away from price-reporting changes by IMS Health.

  6. Now this really IS surprising!

  7. Prior to Med D, our pharmacy stocked the medications on the NYS Medicaid or NYS EPIC formularies. Now with Med D we are purchasing and stocking meds to meet the needs of 8 or so benchmark plans for our dual eligible patients alone. As a result our inventory is not only higher but it turns less often. While we are indeed purchasing more, I hesitate to use purchasing as a yardstick for growth (in our pharmacy) while Med D is still in its relative infancy.

    Steve Moore

  8. Wouldn't generic penetration rate have some impact on purchases as well? If chains are doing a better job of filling with generics, than the dollar amount of their purchases would be lower than other pharmacies filling the same number of scripts but filling with branded medications.

    Also, you say that scripts per store are 50% higher for independents over the past 15 years. But that is probably true for all pharmacies, since volume per store had to rise as reimbursement rates reduced pharmacy profitability, and technology and better use of technicians allowed pharmcies to handle greater volume.