Tuesday, February 02, 2021

Pharmacy Economics Rebound (A Little) Amid Glimmers of Good News

Time to update Drug Channels' exclusive look at independent pharmacy owners’ business economics.

Our analysis reveals that despite what you may have heard, many independent pharmacies have figured out how to survive a highly challenging environment.

Retail pharmacy profits have rebounded—or at least not fallen any further. What’s more, better expense control has allowed the average pharmacy owner’s salary to increase for the first time in years. 

Believe it or not, the pharmacy profit outlook for 2021 also is improving, thanks to the Rutledge v. PCMA decision and the prospect of state Medicaid changes in California, New York, and elsewhere.

Read on for our analysis of pharmacy profits and some thoughts on the hardy retail pharmacy survivors.


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 2020 edition.

The digest presents selected 2019 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 with external analysts. Since I don't have access to the complete financial report, some of the figures below are our estimates. If there is better (or worse) 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. 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 remain stable.

In 2019, independent pharmacies' overall gross margin from prescription and non-prescription products was 22.0%. That’s 20 basis points higher than the 2017 and 2018 figures.

This year’s findings differ from U.S. government statistics, which show higher overall gross margins at chain and independent drugstores. In 2019, the drugstore industry’s overall average gross margin as reported by the U.S. Census Bureau was 24.4%. (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 have increased slightly.

NCPA no longer publicly reports gross margins on prescription vs. non-prescription sales. However, we estimate that for 2019, gross margins on prescription sales were 21.4%. That’s the highest figure in over five years. As you can see in the chart below, prescription gross margins have been remarkably stable.

[Click to Enlarge]
In 2019, the average per-prescription revenue in the NCPA sample was $55.86, slightly higher than the $55.13 per prescription figure for 2018. Combined with the small increase in gross margin, gross profit dollars per prescription increased by 3.1%, from $11.60 per prescription in 2018 to $11.95 per prescription in 2019. Notably, the 2019 gross profit figure is comparable to the figure from 2015.

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

In previous reports, the NCPA digest had 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.

Since 2017, the gap has vanished. IQVIA data show that for 2019, the GDR for unbranded generics in the overall market was 86.2%. The GDR for independent pharmacies was 86%.

4) The average pharmacist who owned a single pharmacy earned about $141,000 in 2019.

We estimate that on a per-pharmacy basis, the owner’s discretionary profit (ODP) shrank from about $200K in 2015 to $129K in 2018. For 2019, compensation grew to an estimated $141,000.

The increase came from better expense control, not higher prescription volume. For 2019, the average annual prescription volume per pharmacy in the NCPA sample dropped by -2.4%, to 57,414 prescriptions. However, total non-owner payroll expenses dropped by almost 5%, which offset the lost gross profit from the lower prescription volume per pharmacy in the NCPA sample.

The salary gap between a pharmacy owner and an employed pharmacist remains small. For 2019, the average gross base salary for a pharmacist at a retail, mail, long-term care, and specialty pharmacy was about $125,000. See Pharmacist Job Market in 2019: Salaries Grew, Retail-to-Hospital Employment Shift Accelerated.

In other words, owning a pharmacy, with all of its hassles and obligations, now brings roughly the same financial reward as being an employee.

5) By the NCPA's count, the total number of independent pharmacies is continuing to drop very slowly.

According to the NCPA’s counting, the total number of independent community pharmacies has declined by almost 1,500 locations (-6%) over the past 10 years. (See the chart below.) Over the past few years, the decline has been very slow, suggesting general stability in overall independent pharmacy numbers.

[Click to Enlarge]

There is little evidence that independent pharmacies are vanishing. Independents have been losing overall market share, though total revenues for this dispensing format have been relatively stable. (See Section 2.3. of our 2020 pharmacy/PBM report.)

FWIW, IQVIA data show that the total number of U.S. retail pharmacy locations is also fairly stable, but declining slowly. IQVIA counts about 20,000 independent locations.


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

Retail pharmacies are experiencing a period of intense competition that continues to pressure prescription profits. The key forces of change reshaping the retail pharmacy industry include:
  • Low generic drug prices, which restrain revenues and gross profits from these prescriptions
  • Lower reimbursements and store traffic from dispensing an increasing share of 90-day maintenance prescriptions
Despite these gloomy trends, there are at least two pieces of good news:
  • Fee-for-Service Medicaid. Managed Medicaid programs are run by PBMs and account for a majority of Medicaid prescriptions and spending. Over the past few years, disclosures about PBM compensation from network spreads in Medicaid has prompted some states to carve out pharmacy benefits to fee-for-service Medicaid.

    In general, pharmacies earn higher gross profits from prescriptions paid under fee-for-service Medicaid reimbursement than the gross profits they earn from those paid under managed care. In April, California and New York—which together account for about one-quarter of managed Medicaid prescriptions–plan to carve-out to fee-for-service. Some smaller states that have announced plans to carve-out pharmacy to Medicaid fee-for-service include Kentucky and North Dakota.

    I briefly explain how retail pharmacies benefit from fee-for-service in Four Unexpected Ways that the COVID-19 Medicaid Boom Will Affect PBM and Pharmacy Profits.

    P.S. States get the side benefit of absorbing 340B profits from contract pharmacies and covered entities by shifting from managed care to fee-for-service. More controversy!
  • Rutledge v. Pharmaceutical Care Management Association (PCMA). The pharmacy lobby scored a major victory with a unanimous Supreme Court decision in this highly watched case. It validated the states’ authority to regulate certain aspects of PBM behavior—including reimbursements to pharmacies.

    Expect small pharmacies to lobby for even more state laws to protect their business and boost their profits. I suppose that’s the American way. But those of you who think like an economist may be familiar with Public Choice theory and the role of special interests. Caveat voter!

    ICYMI, I posted this lengthy Twitter thread with some additional thoughts and unintended consequences on the decision.
More than 20 years ago, I coined a simple phrase to describe the strategic options available in industries that are consolidating: Get Big, Get Focused, or Get Out. Put simply, this means that if a small pharmacy wants to win in today’s consolidating drug channel, it needs scale or differentiation. Otherwise, cash out gracefully.

That's why regional chains and supermarkets are getting voted off the pharmacy island at a rapid pace. Shop Rite and Dierbergs announced their exits last week.

Despite the glimmers of hope outlined above, pharmacy owners should not be surprised if their industry's fundamental competitive economics remain challenging. But I suspect that many will retain their immunity and compete in future challenges.

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