Top Three Trends Facing Drugstores

Pharmacy on Demand

For decades, chain drugstores thrived, expanding their reach and capturing a dominant share of the market. But the past four years have seen a shift. Facing a new online reality and competition from e-commerce giants like Amazon, Costco, and Mark Cuban’s Cost-Plus Drugs, chain drugstores have entered a period of change. The growing influence of Pharmacy Benefit Managers (PBMs) on profits, increased workload on pharmacists, and navigating sales changes and portfolio optimization have forced adaptation. Analyzing these trends is crucial not only for drugstores themselves but also for real estate owners who own them. As a landlord, staying informed empowers you to make proactive decisions about lease renewals, occupancy rates, tenant mix, and property upgrades to maximize the value of your real estate investment in the evolving world of drugstores.

The Squeeze is On: PBMs Threaten Profits

Pharmacy Benefit Managers (PBMs) are playing an increasingly powerful role in the pharmaceutical industry, acting as intermediaries between drug manufacturers, insurers, and pharmacies. While PBMs can benefit patients by negotiating lower drug prices, they are also creating a significant financial squeeze for drugstores through several tactics:

• Low Reimbursement Rates: PBMs set the reimbursement rates that pharmacies receive for dispensing medications. These rates are often low, leaving drugstores with little profit margin after factoring in the cost of acquiring the medication.
• Generic Push: PBMs incentivize the use of generic drugs, which are generally cheaper than brand-name medications. While this can benefit patients, it can also lead to lower profits for pharmacies, as generics have lower profit margins. Specialty medicine now accounts for 51% of all spending, but generics account for 87.9% of US prescriptions dispensed. In the US, the price of generics has fallen by roughly 21% since 2019.
• Direct and Indirect Rebates: PBMs may negotiate rebates with drug manufacturers, but they don’t always pass these savings on to pharmacies. In some cases, PBMs keep a portion of the rebate for themselves, further reducing reimbursements.
• Network Restrictions: PBMs may create narrow networks of pharmacies that are in their plan. This can limit patient choice and force them to use pharmacies with lower reimbursement rates. As seen in the graph below, just six PBMs make up 96% of the entire industry.

Pharmacy Benefits Mangers’ Role in the Drug Supply Chain for Employer-Sponsored Insurance

These practices are significantly reducing chain drugstores’ profitability, demanding strategic adaptations. Lower reimbursements, coupled with an increased focus on generics, lead to shrinking profit margins. Additionally, network restrictions limit the number of customers a pharmacy can serve.

PBM Reform

The rise of PBMs presents a significant challenge for drugstores. To survive, these stores will need to find ways to adapt to the changing landscape. This may involve:

• Negotiating Better Rates: Chain drugstores need to leverage their bargaining power to negotiate higher reimbursement rates with PBMs.
• Diversifying Revenue Streams: Pharmacies may need to look beyond prescription drugs for revenue. This could involve offering additional services, such as vaccinations or medication adherence programs.
• Improving Efficiency: Streamlining operations and reducing costs can help pharmacies weather the storm of lower reimbursements.

The future of drugstores in the face of powerful PBMs remain uncertain. However, by adapting their business models and negotiating effectively, these stores can hopefully find a way to remain profitable and continue to serve their communities.

The Expanding Role of Pharmacists

Traditionally, a pharmacist’s duties focused on verifying prescriptions, dispensing medications, and offering basic medication counseling. However, the healthcare landscape is changing. With an aging population and a growing number of patients with chronic conditions, the demand for comprehensive medication management is rising. Today’s pharmacists are stepping up to fill this gap by increasingly taking on expanded roles and responsibilities to encompass a more prominent patient care role, such as:

• Medication Therapy Management (MTM): Pharmacists conduct comprehensive medication reviews, identify potential drug interactions, and develop personalized plans to optimize medication use and improve patient outcomes.
• Chronic Disease Management: Pharmacists collaborate with doctors to manage chronic conditions like diabetes, asthma, and heart disease by monitoring patients, adjusting medications, and providing self-care education.
• Vaccinations: Pharmacists administer vaccinations for various diseases, increasing access to preventive care, especially in underserved communities.
• Patient Education: Pharmacists educate patients on their medications, including proper use, potential side effects, and storage instructions. The expanded role of pharmacists complements doctors taking a collaborative approach that can lead to improved patient outcomes, reduced medication errors, and lower healthcare costs.

The Future of Pharmacy Practice

The trend of pharmacists taking on increased responsibilities is expected to continue. As the healthcare system evolves, pharmacists are well positioned to play a central role in delivering patient-centered care. By leveraging their expertise in medication therapy and patient education, pharmacists can contribute significantly to improving public health and well-being.

While expanding the role of pharmacists can improve patient care and reduce costs, it can also be a double edged sword. These new responsibilities, on top of traditional dispensing duties, can lead to burnout as pharmacists struggle to manage increased workloads. This, in turn, can contribute to a labor shortage as pharmacists leave the profession or seek fewer demanding positions. This has been evidenced by the multiple recent walkouts, strikes, and labor shortages voiced by both CVS and Walgreens, as well as their recent actions to reduce both store and employee hours nationwide.

Advancements in Pharmacy Services for Enhanced Patient Care

• Tobacco Cessation Services: 20 states authorize Pharmacists to initiate tobacco cessation therapies, including nicotine-replacement products and/or FDA-approved cessation aids.
• Test & Initiation of Treatment Services: 20 states allow Pharmacists to provide appropriate treatment to patients based on results of point-of-care tests for common conditions, including flu and strep throat, via statewide protocols and collaborative practice agreements, products, and/or FDA-approved cessation aids.
• Naloxone Services: 50 states allow Pharmacists to furnish and dispense naloxone within all, via varying forms of authority.
• Hormonal Contraception Services: 21 states recognize Pharmacists’ ability to independently initiate and dispense contraceptives.
• HIV Prevention Services: 13 states authorize Pharmacists to initiate HIV prevention therapies (pre-exposure and/or post-exposure prophylaxis.
• Tuberculosis (TB) Testing: 4 states allow Pharmacists to conduct TB testing without a collaborative practice agreement.
• Pharmacy Immunization Authority: Pharmacists in all 50 states can provide vaccines, to some degree, pursuant to state-specific laws and regulations. To date, 7 states recognize or have recently updated laws to fully align with the authority of the Public Readiness and Emergency Preparedness Act (PREP Act).

Sales Growth & Optimizing Footprints

Despite a nationwide decrease in the number of physical stores, chain drugstores are seeing a positive trend in prescription sales:

• Prescription Sales Rise: Since January 2020, average adjusted prescriptions per store have risen by 14.6% per store per month. Retail and mail-order pharmacies are experiencing the fastest growth.
• Shifting Market: Chain stores lead in monthly sales volume, but all pharmacies have seen significant prescription sales increases. Chain and mass experienced the largest year-over-year prescription volume gains when compared with the rest of the market.
• Post-COVID-19 Impact: Overall prescription growth has slowed since 2022, coinciding with the decline of COVID-19 vaccinations. Brand-name medications have also seen a decrease.
• Med D Growth: Chain drugstores’ prescription growth is primarily driven by Med D, accounting for 95.17% of adjusted year-over-year Rx growth in 2023.
• Clinic Promise: When analyzing the growth percent of sales, clinics and long-term care sales growth is strong, while Hospitals and Home Health Care are weak. Despite Walgreens Village MD model no achieving profitability yet, the clinic sector’s strong growth outpacing the market suggests the potential for further integrating healthcare services within pharmacies. However, many drugstores’ overall retail sales are suffering. This is likely due to a “challenging retail environment,” a term used by Walgreens that could encompass factors like inflation leading to reduced customer spending on non-essential goods at pharmacies or increased competition from discount stores and online retailers for these same products.

Store Closures and Optimization

Drugstores have been restructuring their operations, including their retail portfolios, through several tactics, including consolidating stores, developing smaller stores, and exploring new concept locations.

• The number of retail pharmacies has shrunk by 3.8% nationwide in the past four years, with over 2,250 closures.
• Major chains like Walgreens, CVS, and Rite Aid have announced a combined 1,800+ store closures to optimize their physical footprints.

The number of retail pharmacies has shrunk due to:

• Decreased Foot Traffic: The rising Popularity of mail-order and telehealth services is reducing foot traffic in physical stores.
• Changing Consumer Habits: Consumers are increasingly shopping online or with new competitors, including Amazon, Costco, and Mark Cuban’s Cost-Plus Drugs.
• Shifting Healthcare Needs: The Industry is adapting to future healthcare needs by focusing on clients and healthcare service integration.

Key Considerations for Real Estate Owners

Understanding these trends is crucial for drugstore owners because it impacts your property in several ways:

• Occupancy Rates and Lease Renewals: Trends like rising mail orders or telehealth are influencing how many customers visit physical stores, impacting lease decisions.
• Rent Adjustments: Declining foot traffic due to e-commerce or clinic-based pharmacy services, causing decreased sales in certain locations, is leading to rent negotiation requests from pharmacies more often than ever.
• Tenant Mix: The future of drugstores almost inevitably involves offering more healthcare services or integrating with clinics, potentially further opening doors for co-tenancy with healthcare providers.
• Building Feature Investments: Trends like in-store clinics and in-store pick-up lockers require property modifications.

Next Steps

Knowing your store’s rental rate compared to the market, rent-to-reported sales ratio, and sales trends is crucial for maximizing your investment. As an owner:

Market Knowledge

Are you aware of rental rates for similar-sized buildings (13,000-15,000 SF) in your buildings’ market? Are you familiar with your location’s foot traffic, demographic data, and nearby pharmacy competition to better equip you during lease negotiations?

Sales Performance

Does your store report sales, and have you consistently followed your store’s performance for trends or to understand your performance compared to the national average? By staying informed on these trends, you can be a proactive landlord, making informed decisions about rent negotiations, tenant mix, and property upgrades to maximize the value of your investment.

Let’s Maximize Your Return

We offer expert analysis and insights to arm you with the most valuable knowledge for your pharmacy. Let’s discuss your investment and work together to achieve optimal results.

Conclusion

The drugstore landscape is evolving. While the physical footprint is shrinking, the industry is adapting by focusing on prescription sales, particularly generics, and integrating healthcare services. Real estate owners who understand these trends and apply them to analyzing their specific locations will be better positioned to make informed decisions regarding their pharmacy tenants.