Drugstore Margins Jump in New Gov’t Data

It's time to open a Corona, squeeze a lime into it, and party with new drugstore margin data from the U.S. Census Bureau's latest Annual Retail Trade Survey!

Two interesting factoids:

• The drugstore industry’s average gross margin has been remarkably stable over the past 17 years, averaging 25.7%.

• To my surprise, gross margins grew by 250 basis points to 27.5% in 2009 to reach the highest level in the past 17 years.

The Census Bureau is silent on why margins grew in 2009. My guess? The national retail generic dispensing rate grew, boosting average gross margins.

Although a bit tardy, these data provide the most complete and impartial picture of profits at all store-based retail drugstores, not just the larger public companies. Read on for details and festive charts.

THE DATA

Pharmacies and drugstores are classified in NAICS 446110. NAICS (North American Industry Classification System), which replaced the Standard Industrial Classification (SIC) system in 1997. NAICS is the standard used by federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.

The drugstore data exclude non-pharmacy retail formats (supermarkets and mass merchants) and mail-order pharmacies but include retail revenues from non-prescription front-end sales. For instance, chain drugstores such as CVS (NYSE:CVS) and Walgreen (NYSE:WAG) generate about one-third of their revenues from non-prescription, front-end items. Independent drugstores, meanwhile, generate less than 10% of their revenues from non-prescription sales.

Click here to download the data as an Excel spreadsheet from the Census site. Pharmacies and Drug Stores are on row 20.

MARGIN LEVELS AND TRENDS

The chart below compares the new Census data with comparable data on overall gross margins for the largest three chain drugstores and a sample of independent drugstores. An earlier version of this chart appears as Exhibit 32 in the 2010-11 Economic Report on Retail and Specialty Pharmacies.

Here’s a look at the data over time. As you can see, gross margins at pharmacies and drugstores have remained in the 25% to 26% range during the past ten years. The most recent year (2009) is an unusual departure from trend.

Two caveats:

• These data do NOT show gross margins on prescriptions. I estimate that average gross margins from prescription dispensing at retail pharmacies are 20% to 25%. As I discuss in the “Profitability of Brand vs. Generic Prescriptions” section of my pharmacy report, this overall average reflects gross margins of about 5% to 10% for brand-name prescriptions and 50% to 60% for generic prescriptions.

• The Census Bureau defines Gross Margin to equal Sales minus Purchases, i.e., cost of goods. This definition does not correspond precisely to definitions used public company accounting reports.

Given these data, one has to wonder why pharmacy owners sound like European football players whenever the topic of gross margins comes up.

Anyway, I hope you enjoy commemorating the Mexican army's unlikely victory over French forces at the Battle of Puebla on May 5, 1862, under the leadership of General Ignacio Zaragoza Seguín. ¡Canta! ¡Baila! ¡Celebra!