Tuesday, December 03, 2019

The State of Retail Pharmacy: Independent Pharmacy Economics Stabilize—But Dropping, Owner Salaries Are

Time for Drug Channels’ exclusive look at independent pharmacy owners’ business economics. For Episode XI of our annual review, we again draw upon the latest data from the National Community Pharmacists Association (NCPA) Digest, Sponsored by Cardinal Health. Here's the press release for the recently released 2019 edition.

Below, I update our estimates of pharmacy economics and margins. Our analysis reveals that profits per prescription in 2018 were unchanged from the 2017 figures. However, the average pharmacy in the NCPA sample filled fewer prescriptions, causing the average pharmacy owner’s salary to decline for the fifth consecutive year.

Read on for our look at pharmacy profits and my comments on the competitive dynamics of retail pharmacy. How many independents will survive? Difficult to see. Always in motion is the future.

Drug Channels Institute will host an exclusive live webinar, Drug Channels Outlook: What You Need to Watch in 2020, on Friday, December 13, 2019, from 12 p.m. to 1:00 p.m. ET. Get ready for what will certainly be another year of change for U.S. healthcare. CLICK HERE TO LEARN MORE AND SIGN UP.


The 2019 NCPA Digest, Sponsored by Cardinal Health presents selected 2018 financial and operating data submitted by pharmacy owners. These data have strengths and weaknesses. They do, however, provide the only publicly available, consistently published look at the financial position of independent pharmacies.

NCPA also collects more detailed financials, but it doesn’t share those data. As I understand the situation, NCPA has a self-imposed gag clause to prevent external analysts from examining pharmacy-owner economics. Since I don't have access to the complete financial report, some of the figures below are our estimates. If there is better news, NCPA has chosen not to reveal it.


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 cost 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 an apparent “net loss” if the pharmacy owner chose to pay himself or herself a larger salary instead of reporting a positive net profit.
  • Owner's discretionary profit (ODP) equals the sum of the owner’s compensation and the pharmacy’s operating income. Thus, ODP encompasses two of the three ways a pharmacy can spend its gross profit dollars. The NCPA digest formerly reported the ODP, but it has hidden the figure in recent years.
For more on pharmacy and prescription economics, see our annual Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.


1) Overall independent pharmacy profit margins have stabilized.

In 2018, independent pharmacies' overall gross margin from prescription and non-prescription products was 21.8%. The 2018 figure is equal to last year’s figure.

This year’s findings differ from U.S. government statistics, which show higher overall gross margins at chain and independent drugstores. In 2017 (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 25.7%. (source) The industry margin is higher than the independent pharmacy margin because non-prescription front-end products with higher-gross margins account for a greater share of sales at chain drugstores.

2) Independent pharmacies’ prescription profit margins also were stable.

NCPA no longer publicly reports gross margins on prescription vs. non-prescription sales. However, we estimate that in 2018, gross margins on prescription sales were 21.0%. That’s essentially unchanged from the 2017 figure. As you can see in the chart below, prescription gross margin figures have declined, from 22.0% in 2014.

[Click to Enlarge]

In 2018, average per-prescription revenues in the NCPA sample decreased to $55.13, comparable to the $55.15 per prescription figure in 2017. Combined with the small increase in gross margin, gross profit dollars per prescription increased by 0.5%, from $11.53 per prescription in 2017 to $11.60 per prescription in 2018. This increase was probably not statistically significant.

3) Independent pharmacies’ generic dispensing rates matched those of the overall market.

In recent years, the NCPA digest has recorded 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—lagged that of the overall market from 2012 to 2016. For 2017, the gap essentially vanished.

For 2018, there was a small, but not meaningful, gap. According to IQVIA, the GDR for unbranded generics in the overall market was 85.6% in 2018. The GDR for independent pharmacies was 85%.

4) The average pharmacist who owned a single pharmacy earned about $129,000 in 2018—down for the fifth consecutive year.

For 2018, the average annual prescription volume per pharmacy dropped by -0.5%%, to 58,823 prescriptions. This lower volume resulted in lower compensation for a pharmacy owner. I’m afraid we must judge them by their size.

We estimate that on a per-pharmacy basis, the owner’s discretionary profit (ODP) shrank from $200K in 2015 to $129K in 2018. For 2018, total non-owner payroll expenses were comparable to the 2017 figure. Therefore, the hit to owners’ earnings came from the lower volume of prescriptions per pharmacy in the NCPA sample.

The salary gap between a pharmacy owner and an employed pharmacist has almost vanished. For 2018, the average gross base salary for a pharmacist at a retail, mail, long-term care, and specialty pharmacy reached nearly $123,000. See Pharmacist Job Market: Salaries Keep Growing While Retail Employment Drops .

Owning a pharmacy, with all of its hassles and obligations, now brings the same reward as being an employee. Is it any wonder that many owners are looking to get out?

5) By the NCPA's count, the total number of independent pharmacies continues to drop.

According to the NCPA’s counting, the total number of independent community pharmacies declined by 6% from 2011 to 2018. See the chart below. However, IQVIA data show much more stability in overall independent pharmacy numbers. I can’t figure out the discrepancy.

[Click to Enlarge]


The weak state of retail pharmacy should not surprise regular readers of Drug Channels Institute’s annual economic reports.

Retail pharmacies account for a majority of the pharmacy industry’s dispensed prescriptions but a decreasing share of the industry’s revenues. The NCPA digest reports that only 39% of independent pharmacies dispense specialty medications. This means that most of them lack access to the specialty drugs that now make up one-third of the pharmacy industry’s revenues.

Instead, PBMs and insurers dominate specialty drug dispensing channels. See The Top 15 Specialty Pharmacies of 2018: PBMs Keep Winning.

Independent specialty pharmacies have also been facing slowing growth and mounting competitive pressures, per my comments in The Shakeout Begins: The Fastest-Growing, Private Specialty Pharmacies of 2018.

The U.S. Bureau of Labor Statistics (BLS) projects that chain and independent drugstores will employ 11,000 fewer pharmacists in 2028. Pharmacist jobs at hospitals, physician offices, and other non-retail settings will outpace growth at retail outpatient settings. See Grim Job Outlook for Retail Pharmacists Gets Even Grimmer.

The BLS forecast may prove overly optimistic. The U.S. pharmacy industry faces the prospect of a shakeout that would sharply reduce the number of pharmacy locations. This change would mirror the pre-Internet disappearance of small retailers in favor of national chains. See my comments about other retail industries in Shopping for Prescriptions: How Deductibles Will Reshape the Pharmacy Industry.

Despite the gloom, outside investors seem enamored of prescription dispensing. Amazon continues to signal that it wants to become a large participant in the pharmacy market. Another intriguing trend is the launching of technology-enabled pharmacies that have received substantial venture capital financing. See the companies and business models discussed in Section 12.5.2. of our 2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

It’s tempting for pharmacy owners to fear these changes. Their fear leads to anger—as evidenced by their irrational twitter rants.

The reality is that the pharmacy wars are underway. But as a wise green sage once said: Wars do not make one great.

P.S. For those who don’t have Disney+ or visit the internet, please enjoy CNN’s recap of the Baby Yoda phenomenon.

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