Thursday, December 13, 2012

Pharmacy Profits Over the Generic Life Cycle: Explaining the NARP-NADAC Data

Tuesday’s article—Surprise? CMS Computes and Publishes Pharmacy Prescription Profit Margins—generated a lot of email about the new National Average Retail Prices (NARP) and National Drug Acquisition Cost (NADAC) data sets. In particular, the data table showed average gross profit dollars (NARP minus NADAC) that were lower for generic prescriptions ($9.27) vs. brand-name prescriptions ($11.98). This result seems counter to everything that we all think we know about pharmacy margins.

The apparent discrepancy is resolved by comparing profit levels of  newly-launched generics vs. more-common older generics. Below, I discuss the following:
  • Pharmacy profitability from a generic drug varies over the drug’s lifecycle.
  • As shown using the examples of Lipitor and Plavix, a new generic provides pharmacies with gross profits that are 2-3 times larger than an equivalent brand prescription.
  • 7 of the 10 most widely-dispensed generic drugs have average prescription prices below $10, so potential gross profits are correspondingly low.
The generic lifecycle profit framework also highlights the generic wave’s importance for pharmacies. As long as new generics are launching, life is grand. Once the wave peters out in 2016, margin pressure will be brutal for the retail pharmacy industry.


Pharmacy profitability from a generic drug varies over its lifecycle. Consider three time periods after a brand-name drug loses patent protection:
  • Exclusivity Period—The Hatch-Waxman Act provides a 180-day marketing exclusivity period to the first generic drug applicant that seeks FDA approval prior to the expiration of patents relating to the branded drug product. During the exclusivity period, there can also be an authorized generic competitor.
  • Post-Exclusivity Period—Once the 180-day exclusivity period ends, other manufacturers can begin marketing competing generic versions of the product. Generic selling prices drop sharply during this period.
  • Maturity Period—After 12 to 24 months, the market begins to shake out as some manufacturers exit.
The chart below illustrates the estimated gross profit dollars per prescription earned by a pharmacy in each of these periods. As always, YMMV, because the path for any individual drug can vary significantly from the average.

The story is similar for wholesaler profits, as I explain in the 2012-13 Economic Report on Pharmaceutical Wholesalers, starting on page 39.


Let’s examine gross profits using the new CMS data. Here, gross profit is computed as:

National Average Retail Price (NARP) minus National Drug Acquisition Cost (NADAC).

The table below shows the unadjusted gross profit for 2011’s biggest brands and their therapeutically equivalent generic version: Lipitor (brand) vs. atorvastatin (generic), and Plavix (brand) vs. clopidogrel (generic). In May, both Plavix and Lipitor moved into the post-exclusivity period.

  • Despite the fact that generics had been available for at least four months, the less-expensive generic prescription generated gross profits that were more than twice as large as the brand-name prescription: $26.11 vs. $10.33, and $19.57 vs. $8.70.
  • Actual pharmacy gross profits were probably greater than the amounts shown above, because these figures exclude any adjustments for off-invoice discounts that would further reduce NADAC.
  • These data are reasonably close to my estimates from the FTC's authorized generics report, shown in September 2011’s Pharmacy Profits from Authorized Generics.
By comparison, many older generics are so inexpensive that gross profit dollars are fairly low. In fact, 7 of the 10 most widely-dispensed generic drugs have average prescription prices below $10. The preponderance of these drugs drove the unexpected results in Tuesday’s article.

For instance, the average per-prescription price of simvastatin was only $7.16 and yielded gross profits of $6.17. Even at an 86.2% gross margin, the absolute dollars are low. Pharmacies can still earn acceptable Return on Assets from generic prescriptions because inventory costs also decline sharply.

If you’re still curious, I’ll have more details in the forthcoming 2012-13 Economic Report on Retail, Mail and Specialty Pharmacies.  Coming in January!

  • The NADAC data are only based on survey responses from independent and chain pharmacies. Mail pharmacies and wholesalers do not provide acquisition cost data.
  • 64% of NADAC responses come from independent pharmacies, although independent pharmacies are only 35% of the sample base. (See page 50 of the Myers & Stauffer deck.) Thus, chains are *underrepresented* in the acquisition cost data.
  • A brief methodological comment about the table above: The November NARP data file contains data for September claims. Unfortunately, CMS is vague about the time periods covered by the NADAC data file. I assume the 10/4/12 NADAC file contains data for September. That said, the conclusions would change very little if I had used a different NADAC file.


  1. Employers should be screaming "where is MY savings?". As I have said before, pharmacists should not fear these numbers they should embrace them. Then they should get with individual employers and compare the data of what the pharmacy is being paid vs. what the employer is being charged.

    Municipalities are an easy group to approach, lots of FOIA data to bring into the sunlight. Documenting taxpayer waste with PBM shenanigans is quite easy.

    We have a great example of the Meridian Hospital Group getting hosed in NJ. They dumped their current (Big 2) PBM for a transparent PBM and saved over 1 million bucks the first year.

  2. Hi Adam,

    Do you happen to know if the the Nov. NARP file is still available? The below URLs work for Sep, Oct and Dec, but not Nov.