August 29, 2018
Inside: Owning an independent community pharmacy requires a large investment—financially, physically, and emotionally. But is owning a pharmacy profitable? We’re here to help you find out.
Owning a pharmacy is like owning any other small business. Although your ultimate purpose is to improve people’s lives, your business purpose is to make a profit.
If your business doesn’t profit, patients don’t profit.
Plus, starting a business requires a significant financial risk.
So, the question is whether the investment will pay off. Especially considering the current landscape of rising consolidations and declining reimbursements.
Is owning a pharmacy profitable?
We have the answer.
Every year, the National Community Pharmacists Association (NCPA) releases the NCPA Digest. This report compiles data from independent pharmacies across the nation.
The 2017 NCPA Digest shows that the average independent pharmacy profit margin used to be steady and reliable.
But recently that 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.
But the fact that profit has declined doesn’t mean profit is low.
In fact, compared to other businesses, independent pharmacies make a healthy profit.
The average independent pharmacy profit margin in 2016 was 22.1 percent.
How profitable is that?
Well, it’s among the highest of any industry.
Independent pharmacies outrank accountants, legal services, and even physicians.
To put it in more perspective: Apple’s profit margin for 2017 was 26.6 percent. The most successful retailer in the country only makes 4 percent more than your average independent pharmacy.
And many independent pharmacies make much more than that.
Of course, Apple’s revenue is significantly higher. Which means it gets more from its margins.
But independent pharmacies earn a strong amount of revenue that results in a nice profit. In 2016, the average revenue for independent pharmacies was $3,619,000.
That makes the average independent pharmacy profit $796,180.
But these numbers are averages. Your profit as a pharmacy owner may range far below or beyond it, depending on how you run your business.
Asking if owning a pharmacy is profitable is like asking if joining a team will win you a trophy. It could! If your team is stacked with great players and does all the right things.
How a pharmacy owner runs the pharmacy is more important than industry averages. Some pharmacies make no profit and go belly up. Others make more profit than they dreamed.
Is owning a pharmacy profitable? These five things will determine the outcome.
Prescription sales make up 92 percent of independent pharmacy sales on average.
Increasing your prescription volume will earn more profit overall. The logic for that is obvious. The more you sell, the more you’ll make.
Ideally, you’d increase your profit per prescription. But that’s almost entirely in the hands of payers. (Here are a few strategies to help, though.)
What you can do is sell more prescriptions and hope sales will add up to sufficient profit.
Strategies to increase script count and earn more profit include:
When pharmacies put all their eggs in the prepackaged prescription basket, they limit their profit potential.
In addition, clinical services offer another profit stream for pharmacy owners that can outshine the most profitable prescriptions.
The degree to which pharmacy owners offer expanded services and specialty prescriptions will determine the degree of their profit margins.
Some of the most profitable services independent pharmacies can offer include:
Before you get to take any money home, you have to pay the bills.
Pharmacy overhead costs consist of anything you have to spend to run your business.
Two pharmacies earning the exact same revenue might earn drastically different amounts of profit due to each pharmacy’s overhead costs.
Examples of pharmacy overhead costs include:
The amount you pay for all those expenses determines how much profit you’ll make.
If you can minimize your expenses, you’ll maximize your profit.
Here are some ways to cut your pharmacy overhead costs and make more profit.
A pharmacy’s front end plays a part in the profitability of the business as a whole.
A successful front end could dramatically boost profit. A pathetic front end could leach profit.
Although prescriptions will always dominate your sales, profitable pharmacy owners implement strategies to boost front-end purchases to increase pharmacy profit margins. Because the numbers don’t lie. The average margins on front-end merchandise are 15 percent higher than the margins on prescription sales.
Try these strategies to boost front-end sales:
Cost of inventory affects independent pharmacy profit more than anything else.
Your cost of inventory depends on your primary wholesaler contract and on the secondary wholesalers you choose to buy from.
This is where you’ll find the greatest discrepancy between one pharmacy owner’s profit and another’s. Even if one owner’s business is identical to yours, there could be a 10 percent gap in profit simply because of their purchasing practices.
When it comes to your primary wholesaler contract, don’t simply take what you can get.
To negotiate a better primary wholesaler contract you need:
But your inventory savings don’t end at negotiation. Making the most of your contract arrangement takes meticulous monitoring of your purchasing and impossibly intelligent decision-making. In every contract, complicated inventive structures substantially affect the final cost of goods. In fact, small purchasing decisions can make a difference of $15,000 a month for the average independent pharmacy.
The good news is you can get all this from one service.
Is owning a pharmacy profitable? The answer depends on you.
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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