The Evolving Retail Pharmacy Channel: Implications for Manufacturers

Pharmaceutical CommercePharmaceutical Commerce - September 2009

Aggressive cost competition and the continuing growth of generic substitution will separate retailers’ interests from manufacturers’

Pharmaceutical manufacturers should pay attention to the evolving dynamics within the increasingly competitive US pharmacy industry.

The corner drugstore has evolved into consolidated, multibillion-dollar public corporations that manage the distribution, dispensing, and payment of prescriptions. These organizations will be able to use their emerging influence to extract financial support from pharmaceutical manufacturers as pharmacy margins erode. Manufacturers should be prepared with an integrated approach to engage effectively with these participants and maintain competitive position.

These conclusions come from my new report examining competitive dynamics within the $254-billion US pharmacy industry. The pharmacy market underwent structural changes in 2008 that shifted market share between dispensing channels. Total retail prescriptions rose by only 0.3% in 2008 while revenues grew by just 1.8% to $253.6 billion. Independent drugstores shrank both in revenues and in number of prescriptions, while mass merchants and chain drugstores grew on both metrics. The favorable economics of mail-order pharmacy for both consumers and payers continue to spark growth in this channel.

We project that total prescription revenues of US pharmacies will reach more than $350 billion by 2015, an increase of almost $100 billion from 2008. Average annual growth will be 4.9% between now and 2015. Chain drugstores (including the mail and specialty operations of these companies) will grow to be almost half of the market. Mass merchants will be the fastest growing channel, led by Wal-Mart’s emergence as the third largest retail pharmacy chain by 2010 or 2011.

This forecast reflects overall growth in demand for prescription pharmaceuticals as well as the countervailing influence of generic and specialty drugs. Generic drugs will be almost 80% of US prescriptions by early 2012, slowing pharmacies’ revenue growth as lower-priced generic drugs substitute for traditional (non-specialty) brand drugs. High-cost specialty pharmaceuticals will grow to be 30% of total pharmacy revenues, adding to revenue growth.

Diverging interests

Consolidation and organic growth have created a group of very large pharmacies. We estimate that the top six dispensing pharmacies—CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Wal-Mart, and Express Scripts—accounted for 60% of US pharmacy dispensing revenues in 2008. The three largest PBMs operate the three largest mail-order pharmacies and constitute about 75% of total mail-order prescriptions.

These organizations are competing aggressively with each other to gain a privileged position as consumer and clinical access agents. Manufacturers should be aware that the economic interests of these companies are diverging sharply away from traditional branded drug makers due to the superior profits from generic drugs.

We estimate that generic drugs contributed $13 billion more in gross profits to pharmacies than brand drugs did in 2008. Generic prescriptions are more profitable because of prescription drugs’ reimbursement structure and pharmacies’ enhanced bargaining position with generic-drug manufacturers.

The superior profitability of generic drugs for the channel creates powerful incentives for accelerated generic substitution rates and sharply declining volume for brand-name drugs. Generic substitution is one of the most reliable and consistent ways for a payer to reduce expenditures for a prescription drug plan, further aligning the interests of the channel with payers.

Pressure on pharmacy profits from generic drugs is rising as payers learn more about channel economics, implement new payment benchmarks and use novel cost-plus contracting strategies. The retail generic prescription price war launched by Wal-Mart also threatens the overall profitability of generic prescriptions.

Pharmaceutical manufacturers should prepare for the ways in which these external changes will alter the economics of their go-to-market strategies. Manufacturers must also be ready to engage in greater cross-departmental business analysis and relationship management at both direct and indirect major accounts.


> Adam J. Fein,Ph.D., is president of Pembroke Consulting and author of the widely-read blog Drug Channels. This article adapted from his new report on the US pharmacy industry, available at

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