Chains Win Big in 2009

The pharmacy market continued to undergo structural changes in 2009 that shifted market share between dispensing channels, while overall growth in retail prescriptions remained modest.

Chains were the big market share winners in 2009, while all other formats—independents, supermarkets with pharmacies, and mail-order pharmacies—lost share. The mail-order results are especially surprising. My summary analysis and interpretation appear below.

And from the Department of Shameless Self-Promotion, I note the 2009 data are consistent with the predictions in my pharmacy industry economic report.

The chart below was created from IMS Health’s 2009 Channel Distribution by U.S. Dispensed Prescriptions (published on April 6, 2010). Note that I present the data differently than IMS to facilitate insights into retail pharmacy industry dynamics. Click the table to enlarge it.

OBSERVATIONS

• Chains continue to gain share. The three largest chains—CVS Caremark (NYSE:CVS), Walgreen (NYSE:WAG), and Walmart (NYSE:WMT)—are winning the battle for prescriptions. The chain pharmacies are capturing share with new store openings (although less so than in the past), organic growth from larger and busier pharmacies, and acquisitions of regional chains. In contrast, Walmart’s growth has been almost entirely organic as generic drug discount programs and cost-plus deals increase traffic at their pharmacies.

• Independents lost market share (again). Independents' share of prescriptions is down 170 basis points since 2005. While I believe independent pharmacy will remain a viable channel, I also expect ongoing market share losses to alternate pharmacy formats. Don’t forget that the big 3 drug wholesalers are investing substantial resources in business services designed to support their smaller, more profitable wholesale customers.

• Mail order lost significant share for the first time. Mail-order pharmacy growth is lagging the overall market due to increased competition from retail store-based pharmacies. Walmart and CVS Caremark (with Maintenance Choice) are now both pursuing strategies that eliminate the traditional out-of-pocket cost difference for consumers between mail and store-based pharmacy. If this trend continues, then 2009 will mark a negative turning point for mail at Pharmacy Benefit Managers (PBMs) such as Medco Health Solutions (NYSE: MHS) and Express Scripts (NASDAQ:ESRX).

• Supermarket's share was flat for the third year in a row. Supermarkets are losing prescription growth to Walmart and chain pharmacies. The supermarket industry is also consolidating—the number of pharmacy supermarkets has declined from 10,163 in 2006 to 8,884 in 2008 (per the 2009-10 NACDS Chain Pharmacy Profile).

Please post your thoughts and predictions in the comments below.
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