As I document below, a pharmacy's profits on a generic Lipitor prescription are still double the brand-name prescription's profits. At this stage in the generic life cycle, few other pharmacies are foolhardy (or desperate) enough to give up these superior generic profits. Wegmans' willingness to race to the bottom illustrates the inexorable downward economics facing retail pharmacy in coming years.
What’s the implied value of pharmacy counseling when the prescription is free? Hint: You don’t need to compute the circumference over the diameter to figure out the answer.
RACING TO THE BOTTOM…
As regular readers know, I foresee trouble ahead for the retail channel’s future profitability from core dispensing activities. Generic drugs’ extremely low acquisition cost, combined with the pharmacy industry’s basic fixed-cost economics, has triggered a generic price war. The problems will be especially acute as the generic wave winds down in a few years. See Drugstore Sales Drop Along with Drug Trend: Implications for Retail Pharmacy.
Pharmacies’ willingness to participate in preferred networks (as in Medicare Part D) also reflects the growing price war over generic prescriptions. In addition to competing with low cash prices to consumers, pharmacies are now also competing with lower prices to third-party payers.
Wegmans’ loss leader strategy illustrates the industry’s race-to-the-bottom strategy and exposes the industry's unspoken reality:
Most consumers don’t need much assistance or advice when picking up a prescription.
Yes, yes, I know that certain products and situations will always require counseling and high levels of service. But for the vast majority of maintenance prescriptions, a low-cost, efficient channel is sufficient.
Put another way, the business of dispensing retail prescriptions is often (but not always) a commoditized business that should be priced accordingly. In 2009, Walmart published a prescient article making the same point. See Wal-Mart Explains Its Healthcare Strategy.
Like it or not, we are all learning to shop for prescriptions by price, just like any other consumer packaged good.
…EVEN AS PROFITS STAY HIGH
Wegmans must really be desperate, given the profitability that still remains in generic Lipitor.
Consider retail pharmacies' average gross profit per prescription for Lipitor and its therapeutically equivalent generic version. In May 2012, Lipitor moved into the post-exclusivity period and faced multiple generic competitors.
By December 2012, the less-expensive generic prescription still generated gross profits that were more than twice that of the brand-name prescription. Note that this chart partially updates Exhibit 64 (page 97) from the 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies.
Consistent with the “Lifecycle Profits for Generic Drugs” section (page 94) of the pharmacy economic report, these profits have dropped somewhat over time. For generic Lipitor, pre-prescription gross profits declined by 15% from September to December.
AS EASY AS … YOU KNOW
I computed the chart above using the National Average Retail Prices (NARP) and National Drug Acquisition Cost (NADAC) data. For background, see Surprise? CMS Computes and Publishes Pharmacy Prescription Profit Margins. Gross Profit per prescription equals NARP minus NADAC.
Actual pharmacy gross profits were probably greater than the amounts shown in the chart, because my computations exclude any adjustments for the off-invoice discounts and rebates that reduce NADAC below the published figures. See Government Boldly Launches a Deeply-Flawed Survey of Pharmacy Acquisition Costs.
P.S. Happy Pi Day! Be prepared for next year with the nerdtastic Mental Floss t-shirt pictured above.
P.S.2 Check out the latest Health Wonk Review!