Shhhh! Owning a Pharmacy is Very Profitable

You may not believe it, but independent pharmacy owners are doing financially quite well, averaging almost $300K in personal income in 2008.

This surprising fact comes from the Executive Summary of the 2009 NCPA Digest Sponsored by Cardinal Health. Click here for the NCPA's public Digest page.

Need further proof that times are good? The NCPA has marked the full financial results as “TOP SECRET.” So much for transparency!

I don’t begrudge the right of business owners to earn a profit. But perhaps pharmacy owners should tone down the woe-is-us rhetoric and stop blaming everyone else—the government, PBMs, drugmakers, third-party insurance, cylons, sunspots, whomever—for (supposedly) “low” profit levels.

SURPRISINGLY PRETTY PROFITS

Two quick definitions just to make sure we are all on the same page:

• Gross Profit equals the spread between a pharmacy’s revenues and the cost of goods (COGS) sold to generate those revenues. Gross profit measures the portion of revenues available to cover operating expenses and profit. Think of GP as Earnings Before Expenses (EBE).
  
  
• Gross Margin expresses the spread (Gross Profit) as a percentage of revenues.

Now consider this interesting factoid from the Digest summary: Profits at independent pharmacies have not been declining over time. Yes, really.

• In 2008, pharmacy gross margins were 23.2% of revenues—equal to 2007’s margins. (See Table 1.)
  
  
• Despite what you may have heard, gross margins for independent pharmacies have remained in a relatively stable range from 22% 24% since at least 1999.
  

Average revenues per pharmacy location were $3.9 million in 2008, up 7.7% versus 2007. (See Figure 1.) Since gross margins remained stable, gross profits per pharmacy were also up by 7.7% to $900,000 per pharmacy.

You can read more about pharmacy margins in my pharmacy industry report.

PHARMACY OWNER ECONOMICS

Given the above figures, I estimate that a pharmacy owner got roughly one-third of these gross profits—almost $300,000 in 2008—as discretionary income. Congrats!

Here’s my math.

A pharmacy’s gross profit gets spent in three primary ways:

• Non-Owner Operating Expenses: Everything you need to operate the pharmacy—payroll, rent, licenses, insurance—except the salary and benefits of the owner.
  
  
• Owner Compensation: Salary and benefits of the working pharmacy owner
  
  
• Net Operating Income: The so-called “bottom line”

This is a zero-sum formula. Increasing one part will decrease another. For example, increasing Owner Compensation will decrease Net Operating Income. Keep this simple mathematical relationship in mind when reading pharmacy-sponsored studies about “low profits”.

The NCPA Digest reports the sum of Owner Compensation and Net Operating Income as Owner's Discretionary Profit (ODP). Unfortunately, the current figure is not reported by NCPA in the 2009 Digest available to non-members, so I can’t share it with you on the blog. More on this need for secrecy below.

Based on previous studies, ODP typically ranges from 7% to 8% of revenues, i.e., roughly one-third of gross margins of 22% to 24%. Sources: See my comments below this 2008 Drug Channels post or the reports available in the AMCP’s fine resource library.

Yes, I know YMMV such as the case of Parker Drug. (Hat tip to NCPA's blog.) But last time I checked, the plural of anecdote was not data.

TRANSPARENCY: GOOD FOR THEE, BUT NOT FOR ME

As I state above, I have no conceptual problem with the fact that a small business owner can be handsomely rewarded. It’s one of the things that makes this country great. Whether pharmacy owners make too much money…well, that’s a more complicated question. Just ask Wal-Mart.

So why does NCPA now hide the financial data from the Digest’s surveys? NCPA once made the average financial results available for purchase by non-members, but no longer. In fact, members now get confronted with some scary-looking legalese when downloading the For Your Eyes Only financial data:

The information on this website and contained in the downloadable Adobe Acrobat files (pdfs) regarding the 2009 NCPA Digest, sponsored by Cardinal Health financials contains confidential or legally privileged information is intended solely for the use of active NCPA members. Distributing or otherwise disseminating or copying is strictly prohibited. NCPA members are welcome to use the information regarding the operation of their own business, but taking any other action based on the contents is also strictly prohibited. Any unauthorized use of the contents is illegal.

Yikes!

John Norton at NCPA provided me with the following explanation of why the Digest's aggregated industry averages are no longer available to non-members:

"NCPA is dedicated to advancing independent community pharmacy now and in the future through effective advocacy and resources for our members. As an association, our ability to achieve that mission hinges in part on the strength of our membership. We seek to attract and retain good members by offering tangible, exclusive, and useful benefits. The Digest is the only annual, industry-wide, comprehensive survey of community pharmacies. Members are able to compare their pharmacies with the industry trends, which is a helpful tool for any business owner trying to be successful in the competitive pharmacy marketplace."

'nuff said.

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CAN I INTEREST YOU IN HANUKKAH?

On a totally unrelated note, I neglected to mention the kickoff to the Festival of Lights last Friday. Turn off Adam Sandler and listen instead to Stephen Colbert and Jon Stewart sing “Can I Interest you in Hanukkah?,” my current holiday favorite.