A pharmacist displays boxes of Ozempic, a semaglutide injection drug used for treating type 2 diabetes made by Novo Nordisk, at Rock Canyon Pharmacy in Provo, Utah, U.S. March 29, 2023.
George Frey | Reuters
Drugmakers aren’t the one ones feeling the impact of the burden loss industry gold rush.
Retailers with pharmacy businesses, akin to Walmart, Kroger and Rite Aid, said increased demand for prescription weight loss drugs helped boost sales for the second quarter.
But analysts note that those blockbuster treatments are minimally profitable for retail pharmacies – and will even include margin headwinds.
“More recently, you are beginning to hear retailers discuss these drugs. But I would not say they’re necessarily beneficiaries of the increased popularity,” Arun Sundaram, an analyst at CFRA Research, told CNBC. “They’re really not making much of a profit on the drugs. So it’s really only a traffic driver and not likely a profit pool for retailers.”
Buzzy drugs like Novo Nordisk‘s obesity injection Wegovy and diabetes treatment Ozempic have skyrocketed in popularity over the past 12 months, with high-profile names like billionaire tech mogul Elon Musk amongst recent users.
Those treatments are generally known as GLP-1s, a category of drugs that mimic a hormone produced within the gut to suppress an individual’s appetite.
Other drugmakers, akin to Eli Lilly and Pfizer, are developing their very own GLP-1s in a bid to capitalize on a weight loss drug market that some analysts project could possibly be value $200 billion by 2030. An estimated 40% of U.S. adults are obese, making successful treatments a large opportunity for drugmakers.
However the boom in demand for GLP-1s can also be being felt in other parts of the drug supply chain, including the pharmacies that dispense the prescription drugs to patients.
Are weight loss drugs profitable?
On an earnings call Thursday, Walmart CEO Doug McMillon said the corporate expects weight loss drugs to assist drive sales for the remaining of the 12 months: “We still expect food, consumables, and health and wellness, primarily because of the recognition of some GLP-1 drugs, to grow as a percent total within the back half.”
In June, likewise, Rite Aid CFO Matthew Schroeder said a jump in pharmacy revenue and the corporate’s decision to hike its full-year revenue guidance was “because of the rise in sales volume in Ozempic and other high-dollar GLP-1s.” Schroeder was referring to the hefty price tags of GLP-1s, which range from around $900 to $1,300 within the U.S.
He said those drugs have high sales amounts per prescription, but emphasized that the increased volume of GLP-1s has a “minimal impact” on Rite Aid’s gross profit.
Kroger CEO Rodney McMullen similarly said during an earnings call in June that GLP-1 drug “sales dollars are loads larger than the margin dollars.”
“We might expect the GLP-1 type drugs to proceed but remember, the impact on profitability is pretty narrow,” he said.
That is because GLP-1s like Wegovy and Ozempic are branded drugs with “very, very low gross margins,” in line with CFRA Research’s Sundaram.
He said retail pharmacies generate high sales for every GLP-1 prescription they dispense but rake in low profits, which is having a slight negative impact on the general gross margins of outlets like Walmart and Kroger.
UBS analyst Michael Lasser similarly highlighted in a recent note that gross margins for Walmart’s U.S. business “would have looked even higher had it not been for the contribution of the GLP-1 drugs since these carry very low profit rates.”
A choice of injector pens for the Saxenda weight loss drug are shown on this photo illustration in Chicago, Illinois, U.S., March 31, 2023.
Jim Vondruska | Reuters
Gross margins for branded medications are 3.5% on average for pharmacies, in line with a 2017 study from USC’s Schaeffer Center for Health Policy and Economics. That means it might take years before a branded drug significantly contributes to a pharmacy’s bottom line.
In contrast, gross margins for generic drugs – the cheaper equivalents of branded medications – are 42.7% on average for pharmacies.
There are several reasons for the lower margins of branded drugs. For one, branded drugs don’t directly compete with other medications because they’ve patent protections. That offers drug manufacturers more power once they negotiate drug discounts with wholesalers, which purchase medications and distribute them to pharmacies.
Consequently, there may be “little room for wholesalers and pharmacies to capture large margins because of their relative lack of negotiating power,” in line with the Association for Accessible Medicines, a trade association representing the manufacturers and distributors of generic prescription drugs.
What other impacts do retailers face?
But there are also other impacts of GLP-1s to think about beyond a retailer’s pharmacy business.
For firms like Walmart and Kroger, GLP-1 drugs could also be not directly impacting other business categories in a positive way.
That makes some analysts less apprehensive about margin headwinds in pharmacy: “The gross margin headwind is less of a risk overall for Walmart because any footstep within the door often finally ends up with multiple items in a basket,” KeyBanc analyst Bradley Thomas told CNBC.
“Walmart is usually not a fast store that you just just pop in on the way in which home,” he said. “They will make multiple purchases, and I believe we’re seeing lots of discretionary categories actually see a lift from a few of this incremental traffic they have been getting currently.”
Thomas added that GLP-1 drugs only fall under one a part of Walmart’s business: “In case you’re listing off crucial things which can be driving Walmart’s strong sales performance without delay, it’s probably not making the highest 10,” he said.
It’s a rather different situation for Rite-Aid and similar firms like CVS Health and Walgreens.
Those firms have retail pharmacies but additionally other business segments which can be directly affected in alternative ways by the boom in GLP-1 drugs.
For instance, CVS also operates a health insurer and pharmacy profit manager, or PBM, which maintains formularies and negotiates drug discounts with manufacturers on behalf of insurers and huge employers.
The increased demand for GLP-1 drugs is probably going more of a headwind for health insurers since they need to cover the costly drugs for beneficiaries, but CVS says “the risk is manageable” in that business division.
Meanwhile, PBMs may profit more from the rise in GLP-1 use since they negotiate significant discounts on drugs and drive competition between manufacturers – but they often don’t pass along the entire savings to insurers.
“Each of the companies type of has GLP-1 in them and so they are impacting them in quite a lot of alternative ways,” CVS CEO Karen Lynch said during an earnings call last month.
Correction: The Association for Accessible Medicines is a trade association representing the manufacturers and distributors of generic prescription drugs. An earlier version misstated its name.