Wednesday, June 05, 2013

Profits in the 2013 Fortune 500: Wholesalers, PBMs, and Pharmacies vs. Manufacturers

Time once again for my annual review of the latest Fortune 500 list. Here, I explore the relative profitability of the largest drug wholesalers, chain pharmacies, pharmacy benefit managers (PBMs), and pharmaceutical manufacturers. I also compare these groups with independent pharmacies. These data will help you understand how drug channel intermediaries make money.

Key observations from the new Fortune list:
  • Drug channel companies have higher revenues than pharmaceutical manufacturers, so they rank higher on the Fortune 500. This results from quadruple-counting of prescription revenues within the channel. See my explanation below.
  • Drug channels companies are profitable. When their profits are measured by Return on Sales, profits of wholesalers, PBMs, and pharmacies are only one-tenth of manufacturer profits. But when these profits are measured by Return on Assets, channel company profitability is about half that of pharmaceutical manufacturers.
  • For the second straight year, investors earned higher returns from drugmakers than from the drug channels group. However, the drug channels group has still outperformed manufacturers over the past 10 years.
  • The profitability of a typical independent pharmacy is higher than the profitability of the eight largest drug channels companies, including PBMs. Sorry to be the bearer of...good news?
You’ll find the the technical notes are at the bottom. Add a comment or opinion. Enjoy!


I have gathered the eight drug wholesalers, pharmacy chains, and PBMs on the 2013 list along with their Fortune 500 ranks and links to the financial data as reported by Fortune.
Catalyst Health Solutions, which was acquired by SXC and became Catamaran, dropped off the list. (I don’t know why Catamaran doesn’t appear on the 2013 list.) Medco Health Solutions left the Fortune 500 following its acquisition by Express Scripts, which jumped from #60 on the 2012 list to #24 in 2013.

Here's a handy, exclusive Drug Channels summary of the data for these eight companies. (Click to enlarge.)

Click here to view the 13 largest pharmaceutical manufacturers on Fortune's 2013 list.


The channel intermediaries are much larger than the manufacturers. In 2013, median revenues for the eight drug channel companies were $87.1 billion, up 4.2% vs. 2010. Median revenues for the manufacturer group were $17.3 billion.

Six of the drug channel companies rank in the top 50 of the Fortune 500 list, while the highest ranking manufacturer (Pfizer) reached only #41. The revenues of the 13 largest pharmaceutical manufacturers on the Fortune 500 list range from $67.2 billion (Pfizer) to $5.5 billion (Celgene).

Note that the Fortune 500 rankings are based on sales revenues, so that double-counting artificially inflates the topline of a channel participant. Here's how a single prescription can hypothetically be counted as revenue by four different Fortune 500 companies:
  • Manufacturer A sells a pallet of WonderDrug to Wholesaler B. Manufacturer A reports the net revenue from the sale on its income statement.
  • Wholesaler B sells a case of WonderDrug to Pharmacy C. Wholesaler B reports the net revenue from the sale on its income statement.
  • Pharmacy C dispenses a WonderDrug prescription to a patient. Pharmacy C is reimbursed via a combination of the patient's copayment and reimbursement from PBM D. Pharmacy C reports the revenue from the prescription on its income statement.
  • PBM D reports the reimbursement paid to Pharmacy C as "Network Revenue" on its income statement.

As you can see in the table above, Return on Sales (ROS; profit as percent of revenues) was in the low single digits for all companies in this group, regardless of their position in the channel (pharmacy, wholesaler, or PBM). In 2012, the weighted average ROS (not shown in the table) for the Drug Channels group was 1.6%, a decline from 2011's weighted average of 1.8%.

In 2012, the drug manufacturers’ weighted average profit as a percentage of revenues was a much more robust 17.7%. Thus, the manufacturer-to-channel ratio is 10.9X, i.e., the ROS for the manufacturers was about 11 times the ROS for drug channel companies.


ROS is a flawed measure of profitability for channel intermediaries due to the revenue double-counting. A more meaningful metric is Profits as a % of Assets, a.k.a., Return on Assets (ROA).

ROA relates ROS to the balance sheet assets required to generate an income statement profit. The biggest part of a drug channel company's balance sheet is current assets (cash, product inventory, or accounts receivable). The biggest assets of a pharmaceutical manufacturer tend to be long-term assets such as intangible assets, goodwill, or physical plant, property, and equipment.

The profitability of companies in the Drug Channels universe looks much more attractive this way. In 2012, the group median was 4.3% (range: -5.0% to +6.4%). Once again, Rite Aid was the only company with a negative ROA.

The ROA figures for drug channel companies now look closer to those of the pharmaceutical manufacturers, whose median profits as a percentage of assets was 8.9% in 2010. The manufacturer-to-channel ratio is only 2.1X for ROA, about the same ratio as last year.

The difference reflects partly the innovation/risk premium associated with the expensive, risky, and time-consuming business of drug discovery. Pharmacies, wholesalers, and PBMs wouldn’t exist unless manufacturers actually created valuable and innovative drugs.


The 2012 NCPA Digest provides the following data for independent pharmacies in 2011 (the most recent year available):
  • Average ROS = 2.9%
  • Average ROA = 14.5%
Private pharmacies don’t manage based on the same return metrics as a public company. However, the independent pharmacy data continue to show a Profit as a % of Assets exceeding that of the public companies.


Investment returns reflected last year's strong stock market performance. Here is the median Total Return to Investors in 2012 as reported from Fortune's list:
  • 8 Drug Channels companies: +16.6% (range: 3.6% to +25.6%)
  • 13 Drug Manufacturers: +20.4% (range: -3.7% to +79.5%)
In 2012, investment returns at manufacturers beat those at the drug channel companies. The drug channel group slightly outperformed manufacturers from 2002 through 2012.

  • I include only those drug channel companies that earned a majority of their revenues from pharmaceuticals. This criterion excludes other retail formats with pharmacies (supermarkets and mass merchants). I do not separate the revenues from each company's various lines of business.
  • Using data from the 2012 NCPA Digest, the ROA for independent pharmacies is computed as: Average Operating Income / Estimated Average Total Assets.

P.S. Congratulations to Bob Belknap of Boehringer Ingelheim for winning HDMA's 2013 Nexus Award for Lifetime Achievement. Well done, Bob!


  1. I recall SXC was based in Canada. Might this exclude Catamaran from the Fortune 500?

  2. Yup, that's correct. Catamaran is incorporated in Canada's Yukon Territory. The Fortunes 500 includes only companies that are incorporated in the U.S.

  3. Most corporations would seek to hide or reinvest profits than have to pay corporate income taxes. Most independent pharmacists in NCPA are not that sneaky...

  4. A quick question on Wednesday’s blog… You mention that a single unit/Rx can be recorded as revenue four times. I do not follow the last time – for a PBM.

    PBM D reports the reimbursement paid to Pharmacy C as "Network Revenue" on its income statement.

    I operate under the assumption that the amount paid to a pharmacy by a PBM is an expense (or ‘cost of sales’) and the revenue is primarily from premiums (from insurers/insured.)

    Looking forward to the clarity.

  5. The PBM is a principal to the transaction.

    From page 39 of the ESRX 10-K:

    "Revenues from the sale of prescription drugs by retail pharmacies are recognized when the claim is processed. When we independently have a contractual obligation to pay our network pharmacy providers for benefits provided to our clients’ members, we act as a principal in the arrangement and we include the total prescription price (ingredient cost plus dispensing fee) we have contracted with these clients as revenue, including member co-payments to pharmacies."

    Note that the PBM can earn spreads above what gets paid to the pharmacy. See the section on "PBM Compensation by Plan Sponsors," starting on page 52 of the 2012-13 Economic Report on Retail, Mail, and Specialty Pharmacies.

  6. Not sure I would conclude that independents are more profitable than chains based on a higher ROA. For one, independents outsource the distribution and much of their inventory to distributors, whereas chains do that themselves, increasing the asset base. And second the payment terms are important too; chains may be able to negotiate longer payment terms with suppliers, thus having a lower net asset basis (and a higher return on net assets).

    I think that trends in ROA for independents year to year are an important metric, but the relative position vs. chains is hard to interpret.