Tuesday, December 13, 2016

New Data Show Prescription Profits Under Pressure at Independent Pharmacies

Time for my annual look at independent pharmacy owners’ business economics, drawn from the recently released 2016 National Community Pharmacists Association (NCPA) Digest, Sponsored by Cardinal Health. Here's the press release: Independent Community Pharmacies Vital to Patient Medication Access, NCPA Digest Finds.

Below, I review our latest estimates on pharmacy economics and margins. The data reveal that independent pharmacy owners are starting to perform poorly. In 2015, the average pharmacist owning a single pharmacy earned about $200,000. It’s the second year in which the average owner’s compensation declined. The number of independent pharmacies and gross margins also are trending downwards.

Surprisingly, the NCPA data also show that independent pharmacies are underperforming with generic substitution.

Read on for my look at pharmacy profits and my advice for pharmacy owners.


The 2016 NCPA Digest, Sponsored by Cardinal Health publishes 2015 financial and operating data submitted by pharmacy owners. Today’s post marks my eight annual review of the digest’s data. The NCPA's Doug Hoey published his summary in A Roadmap for Independent Community Pharmacies.

These data have strengths and weaknesses. They do however provide the only publicly available, consistently published look at the financial position of independent pharmacies. Since I don't have access to the complete financial benchmarking report, some of the figure represent our estimates.


A pharmacy’s revenues come from prescription drugs, over-the-counter products, vitamins, cosmetics, groceries, and other merchandise. A typical independent pharmacy generates more than 90% of its revenues from prescriptions.

Here are some basic definitions to clarify the pharmacy profit story.

Gross profit equals a pharmacy’s revenues minus the costs of products (net of discounts and returns) bought from a manufacturer or a wholesaler. Gross margin expresses gross profit as a percentage of revenues.

Gross profit measures the portion of revenues available for operating expenses and operating profit. Operating expenses include: (1) payroll expenses—the wages, taxes, and benefits paid to the pharmacy’s staff, including the business owners, and (2) general business expenses—everything else needed to run the pharmacy, such as rent, utilities, licenses fees, insurance, advertising, and other business costs.

Operating income equals gross profits minus operating expenses. To be profitable, a drugstore’s gross profits must exceed its operating expenses. For example, a pharmacist-operated drugstore could report a “net loss” if the pharmacy owner chose to pay himself or herself a larger salary instead of reporting a positive net accounting profit.

In a previous report, the NCPA Digest defined the sum of Owner Compensation and Operating Income as Owner's Discretionary Profit (ODP). Thus, ODP represents two of the three ways a pharmacy's gross profit dollars can be spent.

For more on pharmacy and prescription economics, see Chapter 10 of our 2016 Economic Report on Retail, Mail, and Specialty Pharmacies.


OBSERVATION 1: Overall independent pharmacy profit margins have remained stable.

In 2015, independent pharmacies' overall gross margin from prescription and non-prescription products was 22.3%. The digest acknowledges that gross margin “remained relatively stable.”

Once again, this survey's findings are consistent with government’s data, which also show stable drugstore gross margins. In 2014 (the most recent year for which data are available), the drugstore industry’s overall average gross margin, as reported by the U.S. Census Bureau, was 24.7%. The industry margin is higher than the independent pharmacy margin because higher-margin non-prescription front-end products account for a higher share of sales at chain drugstores.

I did not publish a post on the most recent Census data, but you can review the figures through 2013 in Surprise! Government Data Again Show Rising Drugstore Profits.

OBSERVATION 2: Independent pharmacies’ prescription profit margins are trending downward.

NCPA no longer publicly reports gross margins on prescription vs. non-prescription sales, but I estimate that gross margins on prescription sales were 21.3% in 2015. Here’s a look at prescription gross margins since the introduction of Medicare Part D. As you can see, these figures have remained fairly stable, but have declined over the past two years. (Note that these data have been restated slightly compared with my previous estimates.)

[Click to Enlarge]

OBSERVATION 3: Independent pharmacies’ gross profit per prescription was stable.

In 2015, average per-prescription revenues in the NCPA sample increased to $56.37, compared with $54.41 per prescription in 2014. Combined with the slight decrease in gross margin, gross profit dollars per prescription grew slightly, from $11.95 per prescription in 2014 to $11.99 per prescription in 2015.

OBSERVATION 4: Independent pharmacies have lower generic dispensing rates.

I noticed an odd discrepancy. For independent pharmacies, the generic dispensing rate (GDR)—the percentage of prescriptions dispensed with a generic drug instead of a branded drug—was 82% in 2015. However, the GDR in the overall market was 83.4%. As the chart below shows, independent pharmacies have lagged behind the market since 2012.

[Click to Enlarge]

The data may illustrate how the independent market is evolving. As I have noted frequently on Drug Channels, entrepreneurial smaller pharmacies are proactively growing their specialty dispensing businesses. Consider the fast-growing independent specialty pharmacies highlighted in 2015’s Fastest-Growing, Private Specialty Pharmacies (From the Inc. 5000).

Another possibility: Many independent pharmacies act as 340B contract pharmacies. The 340B Drug Pricing Program’s crazy incentives lower generic dispensing rates, as described in New Walgreens Data Verifies That 340B Reduces Retail Generic Dispensing Rates.

OBSERVATION 5: The average pharmacist owning a single pharmacy earned about $200,000 in 2016—down for the second year.

In this year’s sample, average annual prescription volume per pharmacy dropped by 1.7%, to 60,493 prescriptions. Combined with declining gross margins, this resulted in lower compensation for a pharmacy owner.

I estimated that the Owner’s Discretionary Profit (ODP) dropped. On a per-pharmacy basis, this figure shrank, from $228K in 2014 to $200K in 2015.

Note that a pharmacy owner still makes more than an employed pharmacist—but the gap is shrinking. See Pharmacist Salaries Keep Rising, Hitting $119K in 2014.

OBSERVATION 6: The total number of independent pharmacies continues to hold steady.

According to the NCPA’s counting, the total number of independent community pharmacies has been relatively stable: 23,064 in 2010; 23,106 in 2011; 23,029 in 2012; 22,814 in 2013; 22,478 in 2014; and 22,160 in 2015. The data do, however, show a slight downward trend since 2012.

MY $0.02: GB-GF-GO

If you’ve been reading Drug Channels, then these financial trends will not be surprising. Competition is forcing pharmacies to reduce their prescription profit margins. Key pressures include:
  • Accepting lower reimbursements for 90-day prescriptions to compete with mail pharmacies
  • Offering retail generic drug discount programs to cash-pay customers
As Peter Drucker said many years ago: “In a commodity market, you can only be as good as your dumbest competitor.”

Pharmacy owners therefore face three core strategic options:

Get Big, Get Focused, or Get Out.

This means that if you’re a small pharmacy and want to win in today’s consolidating drug channel, you need scale or differentiation. Otherwise, cash out gracefully.

Virtual scale can work, which is why almost all independents belong to both a group purchasing organization (GPOs) and a pharmacy service administration organization (PSAO).

Here’s a final thought for pharmacy owners from John Maxwell: “Change is inevitable. Growth is optional.” It's the terror of knowing what this world is about.

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