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 NCPA DIGEST DATA

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 PROFIT PRIMER

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.

SIX OBSERVATIONS ON THE 2015 DATA

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

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

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

OBSERVATION 4: Independent pharmacies have lower generic dispensing rates.

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

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

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

• Paying per-prescription DIR fees to participate in payers' networks

• 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:


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.