Success 2008 NCPA Digest-IN-BRIEF sponsored by cardinal health
[October 2008] Dear Reader: This year s publication of the NCPA Digest, sponsored by Cardinal Health is an important and timely resource as savvy management of pharmacy operations has never been more vital. Understanding your business, and how every inch of your pharmacy makes money is essential during this critical time in our industry. NCPA and Cardinal Health believe in independent community pharmacy and are working hard to ensure that the future is prosperous. Many independent community pharmacists are working diligently towards this same goal. We hope you enjoy the features on a few of these pharmacists as you read through the pages to follow. Cardinal Health is a great partner for independent community pharmacy and values its relationships with community pharmacists. We realize that only through the pharmacist s strength and ingenuity that the viability of our industry can be improved. As a leader in pharmaceutical distribution, NCPA and Cardinal Health continue to build tools and offer resources to help independent community pharmacies succeed in today s competitive marketplace. Cardinal Health through their collaborative partnership with NCPA is pleased to support the Digest tradition of providing insightful analysis and information to independent community pharmacists. We are confident that you will find the information in the 2008 NCPA Digest, sponsored by Cardinal Health to be an excellent reference that will provide you value throughout the year. Sincerely, Bruce T. Roberts, RPh Executive Vice President & CEO National Community Pharmacists Association Mike Kaufmann Group President Cardinal Health HSCS-P Note to NCPA members: The financial data of the Digest, including all benchmarking tables stratified by sales volume, geographic area, population size, and third party utilization, are available online at www.ncpanet.org/digest. 2 2008 NCPA Digest, sponsored by Cardinal Health
The Independent Pharmacy Marketplace Independent community pharmacies are all pharmacistowned, privately held businesses but they vary in practice setting. They include single-store operations, and other independent, pharmacist-owned operations such as regional chain, franchise, compounding, long-term care (LTC), specialty, and supermarket pharmacies. At the end of 2007, there were 23,318 independent community pharmacies, which is relatively close to the number of pharmacy store locations in 2006 of 23,348. It is important to note that this independent community pharmacy industry still represents 40 percent of all retail pharmacies in the U.S. and an $84 billion marketplace. Other notable characteristics about independent community pharmacies: n n n n More than 50 percent of independent community pharmacies are located in an area with a population of less than 20,000. In 2007, 10 percent of independent community pharmacies had total sales of more than $6.5 million, 29 percent with sales between $3.5 and $6.5 million, 32 percent with sales between $2.5 and $3.5 million, and 29 percent with sales under $2.5 million. The average independent community pharmacy is open six days a week and 55 hours per week. In 2007, independent pharmacy owners on average employed 11.3 FTE employees per location. Figure 2 Pharmacy Locations, 5-Year Trend 25,000 23,956 24,358 24,500 23,348 23,318 20,000 15,000 17,389 18,279 18,498 18,709 19,202 10,000 9,501 8,279 8,891 8,988 8,949 5,000 6,362 6,695 6,776 7,433 7,721 0 2004 2005 2006 2007 2008 Independents Traditional Chain Supermarket Mass Merchant The Independent Pharmacy Marketplace 3
Executive Summary The NCPA Digest, sponsored by Cardinal Health provides an annual overview of independent community pharmacy, including a comprehensive review of the financial operations of the nation s independent community pharmacies for 2007. An overview of the average independent community pharmacy is provided below. In general, the average independent community pharmacy location dispensed 61,052 prescriptions (196 per day) in 2007, nearly identical to the 61,087 in 2006. One possible reason for the plateau in average prescription volume dispensed per location could be increased scrutiny by pharmacy operators about which contracts from pharmacy benefit managers (PBMs) they choose to sign. Another possible reason is a decrease in the percentage of stores with sales over $6.5 million, which are traditionally higher prescription volume outlets. Independents continue to operate multiple pharmacies. Twenty three percent of independent owners have ownership in two or more pharmacies and the average number of pharmacies in which each independent owner has ownership is 1.55. The NCPA Digest, sponsored by Cardinal Health data have been collected for more than 75 years, providing the opportunity to look at long-term trends for independent community pharmacies. While gross margins have fallen sharply over the last 10 years due to pressures from PBMs and government reimbursement reductions, average sales per pharmacy location have increased each year through 2005, for a 160 percent increase since 1996. In 2006 sales fell and for 2007 sales remained relatively flat, coinciding with the inception of Medicare Part D. n Average sales per location for 2007 were $3,604,413, almost identical to 2006. Sales volume has stayed flat due to prescription volume staying constant as well as a decrease in the average cost of a prescription due to an increased generic utilization rate. n Gross profit increased slightly to 23.2 percent in 2007. This is still lower than the previous 10-year average (1997 to 2006) of 23.7 percent gross profit for the average pharmacy. TABLE 1 Independent Community Pharmacy At-A-Glance Average number of pharmacies in which each independent owner has ownership 2007 1.55 Value of inventory as cost and as a percentage of sales Prescription inventory $241,777 6.7% Other inventory $56,905 1.6% Total inventory $298,682 8.3% Annual rate of inventory turnover 9.8 Annual rate of prescription inventory turnover Size of area and median sales per square foot Prescription sales per square foot 1,220 square feet $3,637 Other sales per square foot 2,618 square feet $80 Total sales per square foot 3,838 square feet $1,134 Number of prescriptions dispensed per pharmacy location New prescriptions 28,358 46.4% Renewed prescriptions 32,694 53.6% Total prescriptions 61,052 100% 12.1 Average prescription charge $54.79 Number of hours and days per week per location Hours open per week 55 Days open per week 6 Sales activity per hour open Prescription sales per hour $1,169 Other sales per hour $91 Number of prescriptions dispensed 21 per hour Percentage of total prescriptions covered by: Government programs (Medicaid or Medicare Part D) 39% Other third-party programs 48% Percentage of generic prescriptions dispensed 61% 4 2008 NCPA Digest, sponsored by Cardinal Health
Figure 1 Average Annual Sales (in Thousands) Per Pharmacy Location, 10-Year Trend $4,000 $3,580 $3,745 $3,612 $3,604 $3,244 $3,000 $2,855 $2,296 $2,480 $2,000 $1,746 $1,967 $1,000 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 n Payroll expenses, as a percentage of sales, increased again by 0.1 percentage points in 2007 to 13.7 percent, their highest level in the past 10 years. n Operating expenses increased by 0.1 percentage points to 6.5 percent. n Median net operating income percentage increased slightly, resulting in $89,000 in net operating income dollars before tax. This is significantly less than median net operating income dollars before tax of $102,566 in 2005. It is important to note that this year s Digest data reflect the marketplace in 2007, the second year for the Medicare Part D prescription drug benefit. In 2007, 25 percent of prescriptions in independent community pharmacies were covered by Medicare Part D. In 2007, independent community pharmacies faced many challenges both old and new. However, even in the most challenging times, independent community pharmacies continue to lead the way in innovations that define the future of pharmacy practice. The industry has responded by expanding and diversifying its businesses to include enhanced patient care services, such as long-term care, providing access to durable medical equipment products and training, and other valuable community services. For years, independent community pharmacies have been the nation s leaders in providing disease management services to patients with chronic health conditions such as diabetes, asthma, hypertension, and hyperlipidemia. Recently, thousands of independent community pharmacies have embraced the concept of medication therapy management (MTM) services and integrated these services into their TABLE 2 Averages of Pharmacy Operations, 10-Year Trends 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of goods sold 75.1% 76% 76.7% 77% 76.5% 76% 77.9% 76.4% 77.2% 76.8% Gross profit 24.9% 24% 23.3% 23% 23.5% 24% 22.1% 23.6% 22.8% 23.2% Payroll expenses 13.2% 12.8% 12.2% 12.5% 13.1% 13.2% 12.2% 13.4% 13.6% 13.7% Other operating expenses 8.6% 7.6% 7.9% 6.9% 6.6% 6.8% 6.3% 6.5% 6.4% 6.5% Total expenses 21.8% 20.4% 20.1% 19.4% 19.7% 20% 18.5% 19.9% 20% 20.2% Net operating income 3.1% 3.6% 3.2% 3.5% 3.8% 4% 3.6% 3.7% 2.8% 3.0% Executive Summary 5
practices. Other pertinent information about the independent community pharmacist s professional interactions includes the following: n Forty-six percent of independent community pharmacies indicate that they provide MTM, and 50 percent have received reimbursement for their MTM services under Medicare Part D. n Independent community pharmacists talk with their patients about non-prescription items 13 times a day. n Independent community pharmacists consult with physicians 8.2 times daily on prescription drug therapy. This includes generic product recommendations and therapeutic interchange recommendations. Physicians in turn accept pharmacists generic product recommendations 88 percent of the time and 77 percent of the time for other therapeutic recommendations. Independent community pharmacists have proven repeatedly throughout the last 75 years that they are resilient and will modify and reinvent their practices to adapt to economic challenges. They will continue to define the future of pharmacy by timely innovation and exceptional customer service. Most importantly, they continue to be vital health care providers to patients and dynamic leaders in communities of every shape and size, including key locations in rural and underserved areas. 6 2008 NCPA Digest, sponsored by Cardinal Health
Technology Profile MATT MALLINSON, RPh MATT S MEDICINE STORE Independence, Missouri Town Demographics Total Population 109,400 Education High School Grad or Higher 82.9 percent Bachelor s Degree or Higher 15.2 percent Graduate or Professional Degree 5.1 percent Income (Median 2005) $41,398 If you re seeking to identify a typical independent community pharmacist, Matt Mallinson, RPh, would probably be as good a candidate as any. He s the owner of Matt s Medicine Store, located in Independence, Missouri, just outside of Kansas City. The bulk of the 1,200-square-foot pharmacy s business is in prescription sales, Mallinson says, with a fairly small front end and OTC section, along with a limited home/ assisted living service. He is the primary pharmacist and employs four technicians. When it comes to new technology, he admits that for a long time he was hanging back with the pack. In that regard, Mallinson says he certainly fit the profile of many independents. Automation is somewhat scary, he says. We resisted it because it was pricey; it was a new concept; it was different. However, Mallinson says there came a point where he recognized that he needed to take a step ahead to avoid being left behind. A couple of years ago, after several years of looking, Mallinson decided to purchase a robotics system. With the pressures being placed on the profession, he saw three choices, and two of them weren t particularly attractive. There are certain things that are inevitable, he says. You can sit and wait for retirement, you can sit and wait to go out of business, or you can automate. By acquiring a robotics system, Mallinson chose option number three, and he hasn t been disappointed. He says his prescription volume has increased and accuracy has been enhanced. For Mallinson, his robotics system is a sound investment. The cost is roughly equal to paying for 1-½ technicians for three years. After that, the machine will be paid for and Mallinson will have added $200,000 in value to his pharmacy. It s a no-brainer, he says. I ll have an additional asset. Mallinson points out that robotics have enabled him to drive down costs with greater efficiencies. The savings help partially cover the lower reimbursement rates from the insurance companies, he says. Mallinson also says that there are potential financial benefits as well in terms of accelerated tax depreciation. Beyond the financials, the staff attitude has improved. Instead of working until 8 or 9 every night, everyone is going home earlier (closer to 6) and more relaxed. Mallinson says he and his wife even took the time to go on a long-awaited vacation, which would have been out of the question just a few years ago. Mallinson has continued to upgrade by acquiring a workflow automation system to integrate with his robotics system. Ultimately he plans to have a seamlessly automated pharmacy. I didn t always think about technology, he admits. If I d known three years ago what I know now, I would have bought my system then. Mallinson uses his experience to offer advice to those who may be undecided. In my opinion, if you want to stay in business next year, you need to automate, he says. Why wait? Now s the time to automate. Technology Trends 7
JOIN NCPA TODAY! If you were an NCPA member you would have received a full, exclusive print version of the 2008 NCPA Digest, sponsored by Cardinal Health, as well as online access to financial information regarding the independent community pharmacy marketplace. Here is a limited sample of what you are currently missing out on: An in-depth analysis of the independent pharmacy marketplace including trends in operating results for the average pharmacy, for expense management, staff costs, productivity, cash flow, and more. Join Independent pharmacy benchmarking data to compare profitability, cash flow, productivity, and your pharmacy s financial position with other pharmacies. This includes financial data for the average pharmacy, by geographic region, sales volume, population of the community, as well as by third-party prescription activity. Trends in third-party prescriptions and an analysis of the continued impact of Medicare Part D on pharmacies. Technology trends for pharmacy including workflow technologies such as automated dispensing systems and point-of-sale systems. The cost of dispensing for the average pharmacy by geographic region. Data regarding trends in patient care services at pharmacies, medication therapy management, and long-term care services. Profiles of several independent community pharmacists and their respective pharmacies. To learn more, please visit www.ncpanet.org/ownership/digest.php 100 Daingerfield Road Alexandria, VA 22314 Phone: 703-683-8200 Fax: 703-683-3619 www.ncpanet.org
Become an NCPA member and receive the full 2008 NCPA Digest, sponsored by Cardinal Health FREE! NCPA members not only receive a complimentary copy of the Digest, but NCPA n Offers business development advice on store efficiency, staff development, marketing, building consumer loyalty, and lease negotiation. n Is fighting for your interests in Washington, D.C. n Affects your bottom line. NCPA helps you be a better owner, run a stronger business, find better employees, and make more money. Join NCPA today! Simply fill out the form and use any of these three easy steps to join: 1. Fax this application to NCPA at 703-683-3619. 2. Mail with a check or credit card information to NCPA Membership, 100 Daingerfield Road, Alexandria, VA 22314. 3. Go online to www.ncpanet.org, click on Join NCPA. If you have any questions, feel free to call NCPA at 800-544-7447 and ask for membership. Applicant Information q Dr. q Mr. q Mrs. q Ms. First Name Middle Last Nickname/Preferred Name q RPh q PD q PharmD q PhD q Other Pharmacy Street Address City State/Province ZIP Work Telephone E-mail Address Work Fax NABP/NCPDP# (s) NCPA Membership Categories Active Member (Owner/Pharmacist or Manager/Pharmacist) q $295: 1 year q $540: 2 years q $785: 3 years q $2,500: Lifetime Number of stores owned or managed Sustaining Member (Non-pharmacist Owner/Manager) q $295: 1 year q $590: 2 years q $885: 3 years Payment Information Total Amount: $ q Enclosed is my check (Payable to: National Community Pharmacists Association) q Please bill my credit card (choose one): q Visa q Mastercard q American Express q Discover Card Number Security Code Exp. Date Name on Card Signature Today s Date NCPA and logos are proprietary marks of the National Community Pharmacists Association. NCPA dues are not deductible as a charitable contribution for Federal income tax purposes. However, in accordance with provisions of the Omnibus Budget Reconciliation Act of 1994, NCPA estimates that 75% of your 2008 membership dues are deductible under Section 162 of the Internal Revenue Code as ordinary and necessary trade or business expense. M-DIG08