Drugstore Industry Profits Rise Again in Latest Gov't Data

Time once again for my annual look at the U.S. Census Bureau’s Annual Retail Trade Report. These government-collected data provide the most complete picture of revenues at all store-based retail drugstores, not just the larger public companies.

Once again, the Census data show that retail drugstores’ financial position looks better than you may expect. Highlights:

• In 2011, total drugstore gross profits were $54.6 billion in 2011, up $1.5 billion (+2.8%) vs. 2010. Since 2000, drugstore’s gross profits have increased by $21.2 billion.
• Gross margins (gross profits as a % of sales) averaged about 26% from 1993 through 2006, and averaged about 24% from 2007 through 2011.

As we enter the last major phase of the generic wave, how long will the good news last for the pharmacy industry? Feel free to add your prediction in the comments.

THE DATA

NAICS (North American Industry Classification System) 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. Pharmacies and drugstores are classified in NAICS 446110.

The U.S. Census Bureau reports gross profit and margin data annually as part of the Annual Retail Trade Report. On May 31, 2013, revised 2011 data were released and can be downloaded in Excel spreadsheets from the Census site.

A few comments:

• The drugstore data include retail revenues and gross profits from both prescription and non-prescription products. Chain drugstores such as CVS' retail business (NYSE: CVS) and Walgreens (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.
• NAICS 446110 excludes non-drugstore retail outlets (supermarkets and mass merchants) and mail pharmacies.
• The Census Bureau defines gross profit to be "Sales minus Purchases," i.e., cost of goods. This definition may not correspond precisely to definitions used in public company accounting reports, although I believe it's close.

For a primer on pharmacy profits, see Chapter 7 of the 2012-13 Economic Report on Retail, Mail, and Specialty Pharmacies.

THE PROFITS

The drugstore industry’s overall average gross margin, as reported by the U.S. Census Bureau, has remained fairly stable throughout the past 19 years, averaging 25.3%. In 2011, drugstore gross margins were 23.6%, equal to the 2009 figure.

This stability is consistent with pharmacy owner surveys showing that overall gross profit margins for independent drugstores have remained stable—ranging from 22% to 24% over the past 10 years. See Pharmacy Ownership: Getting Less Profitable.

Notably, public company retail drugstore gross margins are higher, averaging 28% to 30%. These public chain figures include higher gross margin front-end products and reflect slightly better drug acquisition costs.

In 2006, drugstore margins dipped. I attribute this one-time decline to three factors:

• Walmart launched its discount $4 generic program, which was subsequently matched by many retail drugstores. See What Free Generic Lipitor Says about Pharmacy's Future. 
• Retail competition for mail pharmacies began heating up. As I note in How the Pharmacy Industry Ch-ch-changed in 2012, mail pharmacies’ prescription growth is far below the overall retail market.
• Starting in 2006, Medicare Part D began shifting seniors from cash-pay to third-party-paid prescriptions. Since pharmacies generally earn higher profit margins from uninsured/underinsured individuals, overall margins declined. Norman Carroll predicted this Part D profit decline. 

Although gross margin has remained stable, total gross profit dollars increased during this period along with total drugstores revenues. In 2011, total drugstore gross profits were $54.6 billion in 2011, up $1.5 billion (+2.8%) vs. 2010.

Due to generic substitution, drugstore revenues are slowing down. See Drugstore Sales Drop Along with Drug Trend: Implications for Retail Pharmacy. Tune in next year to see if generic prescriptions’ higher profits offset the revenue drop.