May 9, 2018
Inside: Retail pharmacy profit margins matter more than ever today. Find out the average independent pharmacy profit and learn how to grow yours beyond it.
These days, not all independent pharmacies are faring the same.
As independent community pharmacies fight uphill battles to hold onto their profits, some are doing better than others.
You look at your profit margins and ask yourself, how do you stack up?
Are other pharmacies finding success in an increasingly difficult industry?
Have they figured out a way to overcome plummeting reimbursements?
We’ve got the answers to that.
And we know how you can earn pharmacy profits that others wish they had.
Discover the average independent pharmacy profit margin and how you can catapult your pharmacy beyond it.
Before you can compare your pharmacy to the average, you need to know how to calculate your pharmacy margins.
Profit margin is profit expressed as a percentage of revenue.
You need to know how to calculate both gross margin and net margin.
Say you spend $100,000 on inventory and sell that inventory for $125,000.
You divide your profit ($25,000) by your revenue ($125,000).
25,000/125,000 = 0.2
Your gross profit margin is 20 percent.
Say you earn a profit of $25,000 on your inventory. Your expenses (salaries, overhead, indirect costs, etc.) cost you $5,000.
You subtract your expenses ($5,000) from your gross profit ($25,000) to get your net profit.
25,000 – 5,000 = 20,000
Now divide your net profit ($20,000) by your revenue ($125,000).
20,000/125,000 = 0.16
Your net profit margin is 16 percent.
So, how does your profit margin stack up against the average independent pharmacy profit margin?
The average independent pharmacy profit margin used to be steady and reliable.
But recently that’s changed.
“Below-cost reimbursement and unpredictable DIR fees in Medicare Part D, combined with other marketplace pressures, have had a profound impact on recent gross margins, falling by 5 percent over the past three years,” according to the 2017 NCPA Digest from the National Community Pharmacists Association (NCPA).
The average independent pharmacy profit margin in 2016 landed at 22.1 percent.
Twenty-two percent might be enough to survive, but not to thrive.
Your pharmacy’s profit margin shouldn’t be less than 25 percent.
And you could be earning far more than that.
Want to earn higher retail pharmacy profit margins than the average independent pharmacy? Here are 10.
Every pharmacy owner knows that pharmacy benefits managers (PBMs) control the price of prescriptions.
They set the average wholesale price (AWP) and you have to take it or leave it.
And it’s no secret to you that many times, they set the price lower than what you pay for the drug. So, you end up losing money when you sell the product.
When PBMs set your prices, they set your profit margin. So, how could you possibly increase your average profit per prescription?
All prescriptions flow from prescribers.
If you find out the top prescribers in for your pharmacy, you’ll find the top source of prescriptions.
Although patients choose their pharmacy, many of them take the recommendation of their physician. Physicians are one of patients’ most trusted sources of healthcare information. (Just behind pharmacists.)
Establish relationships with your top prescribers. In particular, partner with prescribers in fields that prescribe high-margin, high-dollar medications. (Like oncology.)
Be ready with a persuasive explanation on how you can benefit their business by improving the level of care for their patients. They’re subject to strict performance requirements, so if you help boost their performance, they’ll likely reciprocate.
And make sure to nurture the prescriber relationships you already have, too.
Some of your patients need higher-margin medications than others. And some fill prescriptions far more often than others.
Focus on getting the most out of your most profitable patients by increasing their adherence.
Although there’s no simple answer to improving adherence, some strategies can help.
Also, many patients continue to take their prescriptions after they expire. Remind your patients of the dangers of consuming expired drugs and encourage them to refill their prescriptions on time.
You can only get so much out of your current patients. To increase your profit margins, you’ll need to attract more patients.
Don’t just sit back and hope these patients come to your pharmacy. Target the most profitable pharmacy patients. So you can earn more than the average independent pharmacy profit.
The average margins on front-end merchandise are 15 percent higher than the margins on prescription sales.
You also have more control over patients’ non-prescription purchases because they don’t rely on prescribers.
Implement proven strategies to boost front-end purchases to increase pharmacy profit margins.
The price of your inventory isn’t the only factor that affects the margins on your inventory.
Your net profit margin factors in other expenses associated with inventory. Like the costs for ordering it, storing it, and not having enough when you need it.
Getting a better cost of inventory from your primary wholesaler is the by far the best way to boost your margins.
Your primary wholesaler provides the bulk of your inventory, which translates to the bulk of your revenue. So, improving to your wholesaler contract will have the greatest effect on your margins.
But that’s easier said than done.
1. Group purchasing power. When you join a group of pharmacies, you gain buying power through volume.
2. Bids from multiple wholesalers. When you get bids from multiple wholesalers for your business, you drive prices down through competition.
3. Expert industry negotiators. When experts with decades of experience and a thorough knowledge of wholesaler contracting practices negotiate for you, you get the best terms and avoid hidden conditions.
Can your pharmacy get all these on your own?
Traditionally, independent pharmacies join pharmacy buying groups or group purchasing organizations (GPOs) to pool their buying power. These organizations work as cooperatives and negotiate contracts with a national wholesaler (typically only one wholesaler) on behalf of pharmacies.
But better options exist today.
ProfitGuard® is a different take on the buying group model and can provide group purchasing power, bids from multiple national wholesalers, and expert industry negotiators.
This primary wholesaler contract negotiation and management service guarantees independent pharmacies a better cost of inventory than their current deal. In fact, it increases margins by 2-6 percent on average for independent pharmacies.
Make your grass greener. Grow your pharmacy business beyond the average independent pharmacy profit margin.
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their businesses. The company is an independently owned pharmacy services organization based in Kansas City, Mo., that serves independent pharmacies with group purchasing services, expert contract negotiations, distribution services, and more.
PBA Health, an HDA member, operates its own VAWD-certified warehouse with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products.
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