Surprising Growth by Independent Pharmacies

Implications: According to IMS, independent pharmacies were the fastest growing pharmacy channel in 2007.  In fact, independents grew more than 5 times as fast as chains.  This growth is surprising given the heated rhetoric around the “debilitating consequences” of Part D, Wal-Mart’s “predatory pricing,” and the “devastating impacts” of AMP. Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Retail pharmacy is now undergoing a similar shakeout that will leave us with fewer, but larger, independents.

Analysis:

GROWTH BY CHANNEL

When IMS released the final 2007 data in March, they noted that the U.S. pharmaceutical market experienced its lowest growth rate since 1961. However, growth varied substantially by channel. Here are the 2007 growth rates for the four major retail pharmacy channels according to IMS Health’s 2007 Channel Distribution by U.S. Sales report.

    Chain Stores = +1.6%

    Mail Service = +5.2%

    Supermarkets = -1.3%

    Independents = +8.4%

The data come from IMS National Sales Perspectives, which reports sales into each distribution channel tracked by IMS. In other words, the data represent product purchases from wholesalers or manufacturers, not retail pharmacy sales to patients.

As I understand the data, NSP purports to represent sales at invoice pricing, not sales at a list price such as Wholesale Acquisition Cost (WAC). For example, contract pricing, such as a discounts processed via wholesaler chargebacks, should be reflected in the IMS NSP measures of price. However, rebates paid by the manufacturer directly to an insurer or PBM (Pharmacy Benefits Manager) would not be reflected in these data. 

SHAKEOUT TIME

Consider the massive consolidation occurring at the top end of the pharmacy market. The biggest six dispensers – CVS Caremark (CVS), Walgreens (WAG), Rite-Aid (RAD), Medco (MHS), Express Scripts (ESRX), and Wal-Mart (WMT) – fill more than half of all scripts today.

There are half as many independent pharmacies today as there were 15 years ago. Yet by my calculations, the average independent pharmacy today fills 50% more prescriptions than the average independent 15 years ago.

Meanwhile, the aggregate number of pharmacies has barely budged in the past twenty years because new competitive channels – supermarkets, mail, and mass merchants – have filled the gap. Consumers of independent pharmacies still have access to many pharmacies within a reasonable driving distance. Yes, I recognize that patients in some rural communities may have an access issue if their local independent closes. If that’s true, then the solution is targeted support for pharmacies in at-risk markets, not blanket protections for all pharmacies in all markets.

Contrary to the claims of doom, Medicare Part D has been neutral to positive for independents as I note in Pharmacy Profits & Part D (Council Site), which analyzes the relationship between pharmacy size and profitability for independents under Part D.

Put all of these pieces together and you can understand the surprising resilience of the surviving independents in the IMS data.