Outlook: Industry looks forward to potential new Rx business

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NEW YORK — This year, chain drug retailers will be busy preparing for what’s coming up next year.

Starting in 2014, under the Patient Protection and Affordable Care Act more than 30 million Americans previously lacking health insurance will be able to buy health plans through state insurance exchanges or get coverage via broader Medicaid eligibility. For drug chains, this will mean a stream of new customers coming into their stores for prescriptions and health services — and walking through the aisles of products in the front end to get to the pharmacy.

“For the industry, how this year is different from any other is that you’re going to have the health reform law implemented on January 1 of next year,” Joseph Agnese, equity analyst at S&P Capital IQ, said in an interview. “Essentially, drug chains are looking to drive traffic by differentiating themselves and being more relevant to the consumer and their local communities. And I think they’re in a great position to benefit as a lot more people gain health care coverage in 2014.”

National health care spending is projected to rise nearly 4% in 2013 before a sharper increase of over 7% in 2014, according to the Centers for Medicare & Medicaid Services (CMS). Retail outlet sales of medical products grew 3.5% to $367.4 billion in 2012 and are expected to increase 2.7% to $377.4 billion in 2013 and surge 8.7% to $410.4 billion in 2014.

CMS forecasts prescription drug sales, which account for three-quarters of retail medical product sales, to experience a similar growth trend, edging up just over 2% in 2013 before jumping almost 9% in 2014 and then averaging more than 6% through the end of the decade.

“We expect prescription revenues to contract in 2013 on increased conversion of branded drugs to low-priced generic drugs. However, we expect profitability to benefit, as generics carry wider margins than the branded drugs they replace,” Agnese observed in a recent research note. “We expect the generic drug benefits to margins to continue in 2013 as additional branded drugs lose patent protection. Additionally, we see in-store health clinic offerings helping drive store traffic and prescription and front-end sales as services are expanded.”

Retail expenditures on other medical products are slated to grow slightly faster than for prescriptions, according to CMS. Durable medical equipment retail sales were up 7.2% in 2012 and stand to advance 5% in 2013 and 6% in 2014. Sales of non-durable medical products through retail outlets, which grew 3.6% in 2012, are projected to increase 2.7% in 2013 and 10.8% in 2014.

In the prescriptions arena, drug chains continue to dominate. Chain drug stores account for 55% of U.S. prescriptions dispensed, compared with about 18% for independent pharmacies, 12% for food stores, 8% for long-term care facilities and 6% for mail order, according to IMS Health’s latest market data.

“Chain drug retailers are winning the battle for prescriptions. They’re growing much faster than any other format in the market right now, roughly twice as fast as the overall market and taking share from all other dispensing formats,” said Pembroke Consulting president Adam Fein, an expert on drug distribution and the pharmaceutical supply chain. “And with Walgreens coming back into the Express Scripts network, you’re going to see chain drug stores as a whole gain even more.”

Both national and regional drug chains have done much in recent years to spur business in the pharmacy and the front end.

For example, innovative pharmacy designs have made pharmacists more accessible, facilitated consultations, enabled faster drop-off and pickup of scripts, and accommodated a greater range of health services, such as immunizations, medication counseling and health tests.

At the same time, new retail concepts have enlivened the shopping experience via easier-to-navigate stores and more consumables (especially fresh food and to-go items), enhanced beauty departments (including more premium brands and interactive displays), expanded photo services and products, stronger private label programs, and more natural/organic products.

“The drug store chains have really developed a service offering for the consumer that is more complete than some of the other retail alternatives,” Fein said. “For supermarkets and mass merchants, pharmacy has been somewhat of an afterthought; it’s just one more category in the store, like frozen or deli. I think the chain drug stores have shown they’ve been able to bring a whole range of health and wellness services and imaging to the consumer.

“They’ve also been able to build out their front end quite dramatically,” he added. “And you see chains experimenting with different types of store formats for different locations and adding a lot of new services and product offerings. So they’ve become a more attractive destination for the consumer.”

Drug chains, too, have sharpened their marketing and merchandising, particularly by tailoring stores to the neighborhoods they serve and positioning their stores as destinations for well-being and everyday household needs. They’ve also stepped up target marketing via rewards programs and digital media, leveraging the Internet, mobile apps and social media.

“National chains continue to differentiate merchandising through exclusive product offerings and improve the convenience of their stores,” Agnese stated in his report. “Expansion of loyalty card programs will help provide retailers with improved marketing and promotional spend efficiency and customers with a more personal shopping experience.”

Going forward, key challenges for drug chains include thinning pharmacy reimbursements, changes to drug pricing models, the need to grow their business in the burgeoning specialty drug space, and rising competition from PBMs, mass merchants, dollar stores and supermarkets.

Demographics, though, play to drug stores’ strength: health care. With 10,000 baby boomers turning 65 every day, chains should see store traffic and demand for prescriptions escalate, Agnese reported.

“We have a positive fundamental outlook for the drug retail sub-industry for the next 12 months. We believe benefits from increased sales of generic drugs will support margins, despite increased drug reimbursement pressure and increased competition from nontraditional formats,” he wrote. “We think national chains are well positioned as their pharmacy departments continue to gain in importance, with prescription sales increasing and contributing about 70% of total sales.”

*To read the full State of the Industry 2013 report, including economic analysis, drug chain profiles, interviews with chain drug retailing leaders, and industry trend articles, please see the April 22, 2013, print issue of Chain Drug Review.


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