Chain pharmacy sales boom as script count soars

Drug Store News, August 30, 1999 by James Frederick

With the aging of the nation's baby boomers, the steady development of new and expensive breakthrough drugs, increasing drug utilization among managed care patients and moves in Congress to add prescription drugs to Medicare benefits, one thing about the U.S. pharmacy market seems guaranteed: sales will continue a strong growth trend. What isn't known, however, is where that growth will occur, and whether or not it will mean much in the way of profit for the chain drug industry.

The advent of online drug stores such as PlanetRx and drugstore.com made plenty of headlines and grabbed Wall Street's attention over the past year. But thus far, at least, only a tiny fraction of the U.S. pharmacy market is conducted online. What's more, with the purchase this year of soma.com by CVS, Rite Aid's investment in drugstore.com and the ongoing development by Walgreens, Drug Emporium and other chains of their own online drug stores, much of the electronic pharmacy market is likely to go to brick-and-mortar retailers.

On another front, the drug chain industry is taking on the managed care industry directly. Rite Aid's recent $1.5 billion purchase of PCS Health Systems from Eli Lilly is the biggest example. The bold buyout thrust the chain drug giant into the top ranks of prescription benefits managers, giving it access to a customer base of more than 50 million prescription-plan users and heralding a possible redefinition of the often-thorny relationship between managed care and retail pharmacy.

Other chains also have pushed more deeply into the PBM arena. CVS, for example, added several million new customers to its PharmaCare PBM subsidiary over the past year by signing contracts with the federal government and other groups. In all cases, drug chains that own their own PBMs are gaining adherents by leveraging their expertise in retail prescription service and their existing relationships with patients and dispensing physicians.

Meanwhile, pharmacy chains continue to make the most of the dramatic rise in prescription drug use and new drug prices, with prescription sales at the nation's chain drug stores rising 16.2 percent in 1998 to $41.5 billion, according to the National Association of Chain Drug Stores. Mass merchandiser pharmacies also drove sales ahead 16.2 percent to $10.4 billion, while supermarket chains drove their prescription revenues ahead 16.9 percent to $11.4 billion, NACDS reported.

For the second year in a row, CVS was the clear leader in U.S. pharmacy sales with $8.5 billion in prescription revenues. Walgreen Co. was ranked second, with $7.6 billion in pharmacy volume, but it ranks highest among large drug chains in average number of scripts per store, with 251 per day. Among the top five pharmacy retailers nationwide, that compares with 167 scripts per day for CVS, 182 for Eckerd Corp., 147 for Rite Aid, and 173 for Wal-Mart Stores.

Overall, prescription drug sales nationwide jumped 15 percent last year, NACDS reported, to $102.5 billion. The gains were fueled by a record 2.8 billion prescriptions--a record that interim NACDS president and chief executive Bob Hannan predicts will grow by 43 percent over the next six years. "That means in the year 2005 America's pharmacies will fill 4 billion prescriptions--nearly 11 million per day," said Hannan earlier this year.

Drug chains are the clear leaders in U.S. prescription sales, filling 60 percent of all outpatient prescriptions in 1998, according to NACDS. That number will grow to 65 percent by 2005, the organization predicts, as consolidation continues to sweep retail pharmacy nationwide and more independents close or merge with their chain rivals.

Most of the nation's top drug chains are outpacing the overall gain in pharmacy sales, thanks to big investments in workplace automation, new dispensing efficiencies, aggressive marketing, market acquisitions and internal growth. Said Walgreen Co. chief executive L. Daniel Jorndt, "Between the age wave, managed care, inflation and high-tech drugs, we've been growing our pharmacy business at over 20 percent. I don't see that stopping."

What's more, Walgreens, CVS and other leading chains appear to have arrested the long and painful slide in gross margins at the pharmacy counter. How? By leveraging their growing market dominance with third party payers, walking away from prescription benefit contracts that won't turn a profit. Although prescription-plan reimbursements by managed care plans continue to be a major headache for retail pharmacy, chains that can saturate a market with enough locations are finding they often have the bargaining power with prescription plan contractors to draw a line in the sand and stick to it.

By doing so, the largest chains--or regional players with a strong share of a local market--are finding some plans willing to return to the bargaining table to renegotiate terms. "While we continue to get pressure to reduce our reimbursement structures, given the alternative solutions we can bring to the table, as well as a more aggressive negotiation style, we have been able to neutralize that margin decline," said a pharmacy executive at one of the industry's biggest chains recently. "We've had dozens [of plans] where we've had to identify to those groups that we were unwilling to participate at their proposed rate. They have then come back to renegotiate."