Indie pharmacy’s strong roots bolster industry amid downturn
Independent pharmacy has been slammed hard by the continuing slide in prescription-dispensing profits, a dismal economy and powerful chain store competitors. But with their strong ties to local communities and the patients they serve, most are weathering the storm and may emerge stronger than ever.
That’s the hopeful prediction from pharmacy leaders and advocates, and there’s evidence to back it up. “Community pharmacy is on the move,” asserted Bruce Roberts, EVP and CEO of the National Community Pharmacists Association. He pledged at the organization’s annual meeting for independent pharmacists last fall that “community pharmacy will not be an afterthought in the healthcare reform debate.”
Citing the independents’ strong patient relationships, their role as health-and-wellness innovators and the growing power of NCPA’s political action committee, Roberts said he foresees “a future of having community pharmacists front-and-center in the healthcare system and our industry recognized as a political powerhouse second to none."
“For too long, community pharmacy was an afterthought,” he noted. “Now that is changing. It must continue to change until we are recognized for our rightful role as managers of the pharmacy benefit who treat every patient as a person, not a covered life.”
To reach that goal, small-scale pharmacy owners will first and foremost have to ride out today’s operating challenges. The 2008 edition of the NCPA Digest, underwritten by Cardinal Health, counted 23,318 independent community pharmacies operating in the United States at the end of 2007, marking a slight drop from the 23,348 counted at the end of the previous year. The tally includes “all pharmacist-owned, privately held businesses,” noted the Digest, including “single-store operations and other independent, pharmacist-owned operations, such as regional chain, franchise, compounding, long-term care, specialty and supermarket pharmacies.”
“It is important to note,” added the 2008 report, “that this independent community pharmacy industry still represents 40% of all retail pharmacies in the U.S. and an $84 billion marketplace.”
What’s more, even small-scale, owner-operated pharmacies are increasingly bolstered by sophisticated high-tech pharmacy systems, including robotic dispensing tools in some stores and market-pricing analytics. Those tools, coupled with the support most independents derive from their wholesale suppliers and membership cooperatives, have helped assure the stability and economic vitality of the independent pharmacy market in spite of the difficulties of a brutal economic recession and chain competition.
Indeed, independently owned pharmacies remain the wellspring of customer-oriented service and personalized care in the pharmacy setting. Owner-operated pharmacies also remain the bedrock of first-line patient care in many small-town settings.
“More than 50% of independent community pharmacies are located in an area with a population of less than 20,000,” the 2008 Digest reported.
Nevertheless, the independent segment of pharmacy remains the most vulnerable to the forces roiling all of pharmacy retailing: the power of pharmacy benefit management companies to dictate terms and reimbursement levels; steadily shrinking profit margins for prescription drugs, particularly generics; intense competition; a funding crisis for all healthcare services; and, most recently, an economy on life support.
The impact of those forces has made independent operators the canaries in the coal mine of 21st century health retailing. “In 2006, the profitability of [independent] pharmacy took a strong hit,” noted the 2008 Digest, when a sobering 22.9% of owner-operated pharmacies operated at a loss. That same year, “more than 1,100 pharmacies ended up closing their doors,” according to the report.
“In 2007, independent community pharmacy saw a slight improvement compared with the previous year,” the Digest continued, “with 19.2% of pharmacies operating at a loss.”
Average per-store sales at mom-and-pop pharmacies also remained flat at roughly $3.6 million, after peaking at $3.75 million in 2005, according to Digest researchers. The culprit, they reported, is “prescription volume staying constant, as well as a decrease in the average cost of a prescription due to an increased generic utilization rate.”
Indies did see some improvement in gross profit margins in the most recently tracked fiscal year, up 0.4% to 23.2%, according to researchers. And median net operating income increased by 0.97% to 2.97%, thanks to better management of costs and other factors.
Nevertheless, there’s no question that the recession is weighing heavily on smaller drug retailers, said independent pharmacy owner Steve Morton. “We’re certainly starting to see some of the economic impact,” he said. “There are patients who are making choices to either delay prescription refills or not get them at all, sometimes just to save a co-payment. We’re also seeing that in our medical community here, where people are delaying getting to the doctor when they should.”
One effective way to respond to the economic crisis, he said, is to get out in front of it by branching into other potential revenue streams and building patient loyalty by going outside the four walls of the pharmacy.
“When I talk to other independents, it always surprises me that some of them haven’t reached into providing services to assisted-living facilities,” observed Morton, who is president and CEO of Morton Pharmacy, a 13-store independent pharmacy operation based in Neenah, Wis. “They’re completely retail-based and waiting for the customer to come to them, versus going out and seeking customers and referral sources that would send them business.”
“For us, a full third of our business is caring for patients in some type of facility, whether it be a nursing home, assisted-living facility, a developmentally disabled home or even an independent-living kind of complex. That’s generally business that gets sent to us, … and it’s the fastest-growing area of our pharmacy,” Morton told Drug Store News.
Pharmacy owners, he added, “seriously need to look at long-term care or the assisted-living markets because, as those patients enter those facilities, if you’re not the pharmacy of choice for that facility, you’re going to lose them. And you may have served that patient for the last 40 years.”
Morton acknowledged the valid concerns pharmacy operators have in serving nursing homes, which demand a more complex business and service model. However, he said, “You don’t have to go into the nursing home business. You can just provide services into assisted-living or developmentally disabled homes, which are no where near as complex as far as the consulting roles go.”
The ability of nimble independents to exploit their close relationships with patients and service capabilities will be key to community pharmacy’s future, other retailers agreed. “In tough economic times, you’ve got to continue to be great at what you are, and what independents are great