Tuesday, April 17, 2012

Drugstore Margins Remain Stable in Latest Gov’t Data

The U.S. Census Bureau just released its 2010 Annual Retail Trade Report. These government-collected data provide the most complete picture of revenues at all store-based retail drugstores, not just the larger public companies.

Contrary to what you may have heard, the financial position of retail drugstores has not deteriorated in recent years. Here are some surprising facts from the government’s latest official data:
  • In 2010, total gross profits of drugstores and pharmacies were $53.3 billion, up $1.8 billion (+3.5%) vs. 2009. Gross profits have increased every year since 2000.
  • Gross margins (gross profits as a % of sales) averaged about 26% from 1993 through 2006, and averaged about 24% from 2007 through 2010. Gross margins were stable from 2007 to 2010.
Below, I speculate on what happened in 2006 that changed the trend. Feel free to add your own guesses in the comments.


NAICS (North American Industry Classification System) is the standard used by federal 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. NAICS replaced the Standard Industrial Classification (SIC) system in 1997.

Click here to download the gross margin data as an Excel spreadsheet from the Census site. Pharmacies and Drug Stores are on row 20.

A few comments:
  • These figures do not show prescription gross margins. The 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. Public companies also have other sources of revenues and profits.
  • NAICS 446110 excludes non-pharmacy retail formats (supermarkets and mass merchants) and mail-order 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.

You may be surprised to learn that drugstore margins are not collapsing. In fact, overall profit margins are pretty stable.

The U.S. Census Bureau’s latest retail data show 2010 gross margins for Pharmacies and Drug Stores (NAICS 44611) to have been 23.9%—identical to the 2007 gross margin figure. These data are consistent with NCPA member surveys showing that overall gross profit margins for independent drugstores have remained stable—ranging from 22% to 24% over the past 10 years.

Total gross profit dollars actually increased during this period along with total drugstores revenues. In 2010, total drugstore gross profits were $53.3 billion in 2010, up $1.8 billion (+3.5%) vs. 2009. (See chart below.) For comparison, NACDS reported that prescriptions at chain and independent drugstores grew by only 1.1%. (source)

There is one notable restatement in this year's data. Last year, the Census Bureau reported an unusual jump in pharmacy margins for 2009. (See Drugstore Margins Jump in New Gov’t Data.). The restated data are more consistent with historical data releases. Sorry, I have no idea what happened in the 2009 annual report.


The chart above shows a margin decline starting 2006. Here are three possible explanations:
  • Walmart launched its discount generic program, which was subsequently matched by many retail drugstores. Here’s a time-capsule post with my predictions from the September 2006 $4 generic program launch: Wal-Mart's Generic Pricing Will Trigger Big Changes. (Yikes, I’ve been writing Drug Channels for a long time!)
  • Starting in 2006, Medicare Part D began shifting seniors from cash-pay to third-party-paid prescriptions. One of the pharmacy industry’s dirty little secrets is the fact that pharmacies can earn much higher profit margins from uninsured/underinsured individuals. (Yes, pharmacy owners really do complain when insurance coverage is expanded and drugs become more affordable.)
A prescient 2008 article by Norman Carroll predicted precisely the Part D profit decline. See Estimating the Impact of Medicare Part D on the Profitability of Independent Community Pharmacies (Journal of Managed Care Pharmacy, 2008). Dr. Carroll based his conclusions on the fact that pharmacy gross margins for cash-pay prescriptions averaged 43% in 2005, vs. third-party margins of about 20%. More recent data (from 2009) show cash-pay margins that were still 2X third-party margins. See The True Economics of Pharmacy Ownership.

Any other theories?


  1. Maybe I just like to see the debate between you and Indy owners, but do you have any breakout of brand and generic gross margins?  Particularly generics where the PBMs are implementing draconian cuts to MAC.

  2. There's really nothing to debate. These are just the numbers published by the U.S. Census Bureau. Unfortunately, there is no Census data on margins by product line. 

  3. Of course, the reason cash-paying customers are more profitable is because PBMs have clauses in their contracts that they will not reimburse more than a pharmacy charges a cash paying customer. The vast majority of independent pharmacists would prefer to take losses to help out an uninsured community member, but if they do that, every single claim for that same item will be reimbursed at a loss. In addition, the PBMs incent the pharmacy owners to set the Usual and Customary (cash) price significantly higher than they might get reimbursed from a PBM because if there is a price increase and the pharmacy doesn't react immediately, they will be losing across the board, a devastating blow to an independent whose margins have been dropping/stagnating, far below the average increase in the cost of conducting business.
    And very interesting that in the article you wrote after the 2009 figures were released you wondered why independent pharmacists sound like "European Football Players" when the 'facts' show otherwise. Turns out facts aren't always facts, and anecdotes aren't always wrong. Seems like you owe a few apologies.

  4. PUTT-Dave MarleyApril 17, 2012

    Just a couple comments (of course).

    First, the data does not break out pharmacy dept. margins from total store margins. I haven't seen anyone complain about front margins, but then again all stores still have the ability to control their non-prescription prices.

    I'm not sure where you get your front/rx numbers but either way the chains have a MUCH greater ability to protect total margins (and skew report overall data) when they  get as much as 40% of their total margin from non-prescription sales. Further, most indys are closer to 95%rx, than the 90% you state.

    Second, we didn't start sounding the alarm about reduced generic MAC prices and by extension reduced margins (as loudly as we are now) until 2011, and 2012 is even worse.

    In this case I would say the study was hopelessly outdated the minute it was released.

  5. PUTT-Dave MarleyApril 18, 2012

     I didn't accuse you of bias, and it was a genuine offer to come see the real world as opposed just reading numbers off a sheet of paper. Further, a report/study is only as good as the data contained,or as bad as the group or organization funding it.

    My interest is in pointing point to study design and data collection flaws as it relates to misinformation being reported about my industry.

    If I could add one more descriptive to PUTT it would be "Pharmacists United for Truth, Transparency.....and Accountability."

    A lie repeated often enough is not the truth.

  6. We'll have to disagree here, Dave. I don't consider data reported by IMS Health, the U.S. Census Bureau, or audited SEC filings to be "lies."

  7. PUTT-Dave MarleyApril 18, 2012

    As part of my doctorate training, I had to sit through an entire (mind numbing) semester course called "Literature Evaluation and Review" Lectures included: "when is a p value just a p-value" "who paid for what conclusion" "got power?" "tell me what you want-it's not just a song" "NNT, is over 100 bad?(see Lipitor)"

    I'm just trying to put that torture to good use. Even (or is it especially?) government reports can be flawed, and/or have flawed conclusions.