NCPA-Pfizer Digest: Executive Summary and Management Tool

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cher Resource Group 4:15 p.m. 5:45 p.m. Tuesday, October 12, 2004 Boston, Massachusetts This program is approved by NCPA for 0.

1 NCPA-Pfizer Digest: Executive Summary and Management Tool Presented by: Steve LeFever, Business Resource Services; Donna M. West, Ph.D., Assistant Professor, University of Arkansas; and David Wendland, Vice President, Hamacher Resource Group 4:15 p.m. 5:45 p.m. Tuesday, October 12, 2004 Boston, Massachusetts This program is approved by NCPA for 0.15 CEUs (1.5 contact hours) of continuing education credit. NCPA is approved by the Accreditation Council for Pharmacy Education as a provider of continuing pharmacy education. 311

2 NCPA-Pfizer Digest: Executive Summary and Management Tool Educational Objectives: 1. Describe the financial performance and trends of independent community pharmacy in Identify the top five patient care services and the top five disease state management programs offered by independent community pharmacy. 3. Describe the management efficiencies that exist in the top 25 percent - those who earned the highest owner's discretionary profit percentage. 4. Discuss how ratio analysis plays an important role in benchmarking an industry and an individual company.

3 2004 NCPA-Pfizer Digest Donna S. West, R.Ph., Ph.D. University of Arkansas for Medical Sciences College of Pharmacy College of Public Health Introductions Steven LeFever, Chairman and Founder, Business Resource Services David Wendland, Vice President, Hamacher Resource Group The Pharmacy and Pharmacist Care Donna S. West, R.Ph., Ph.D. University of Arkansas for Medical Sciences 1

4 Demographics 26% of independent owners own 2 or more pharmacies 68% of Digest respondents are located in a rural area Average Digest pharmacy is 3,799 square feet Prescription Sales Other 9% Rx 91% Prescription Volume 56,399 prescriptions per pharmacy location 53% of Rxs dispensed are generic 2

Jack Coffey, R.Ph. Shawnee, Oklahoma Employee Wages 2002 2003 Staff pharmacist $37.96 $40.10 Pharmacy technician $11.

5 Jack Coffey, R.Ph. Shawnee, Oklahoma Employee Wages Staff pharmacist $37.96 $40.10 Pharmacy technician $11.03 $11.60 Clerk/cashier $8.26 $8.45 Third-Party Trends % Medicaid Other

6 Technology 94% have Internet at pharmacy 88% have at pharmacy 48% have website Technology 18% have automated phone system 30% have point-of-sale system 17% have automatic dispensing system 52% have system for workflow Patient Care Services 85% Delivery 84% Patient Charge Accounts 83% Nutrition 74% Durable Medical Goods 62% Compounding 40% Long-term Care 4

7 Ricky Guidry, R.Ph. Iowa, Louisiana 24% sterile products Compounding 53% veterinary products Disease State Services 59% Blood pressure monitoring 48% Diabetes training 28% Asthma training 24% Immunizations 12% Osteoporosis 14% Lipid monitoring 4% AIDS services 3% Anticoagulation monitoring 1

8 Michael Kim, Pharm.D. Washington D.C. Pharmacist Interaction with Other HC Professionals 7.0 times per day 92% generic recommendations 82% therapeutic recommendations Mark Riley, Pharm.D. Little Rock, Arkansas 2

9 Together, community pharmacists and medicines provide an unequaled promise to keep Americans healthy. Independent community pharmacy continues to be a dominant force in serving patients with their health care needs and a major force in the pharmaceutical marketplace. Pfizer Acknowledgements Business Resource Services Hamacher Resouce Group Doug Hoey, R.Ph.,M.B.A. Woodpile Studios 2004 Digest 3

10 Thank you for your participation in the 2004 NCPA-Pfizer Digest 4

11 Key Financial Performance Indicators Profitability Productivity Financial Position Cash Flow Financial Data Presented All Participating Pharmacies Top 25% Sales Categories Geographic Regions High versus Low Third Party Rx Rural versus Metropolitan Guide To Benchmarking Available at Includes The Financial Cause and Effect Road Map Includes Suggested Action Plans For Improving Your Profitability, Productivity, Financial Position and Cash Flow What To Do Next Steps to integrate financial benchmarking into your management process 1

12 The Top 25% and Owner s Discretionary Profit Percent Net Profit Before Tax Plus Owner Compensation Divided by Total Sales Owner s Discretionary Profit Percentages 10.5% Top 25% Median 7.5% 5.0% Bottom 25% 2003 Highlights Median sales increased by 13.0 percent The trend of rising payroll expenses continued. Gross margin improved by offset the increasing payroll expense. While average owner s discretionary profit percentages were unchanged increasing sales drove owners discretionary profit dollars up by 11.5 percent. 2

13 Long Term Trends $4,000 AVERAGE ANNUAL SALES (IN THOUSANDS) PER PHARMACY LOCATION $3,244 $3,000 $2,855 $2,296 $2,480 $2,000 $1,269 $1,339 $1,442 $1,649 $1,746 $1,967 $1,000 $ % 8.40% 8.20% 8.00% 7.80% 7.60% 7.40% 7.20% 7.00% 8.10% Long Term Trends Owner's Discretionary Profit Percentages 8.30% 7.80% 7.90% 8.10% 8.50% 7.60% 7.90% 8.10% 8.10% Profitability All Participating Pharmacies Payroll Expenses 9.1% Other Operating Expenses Profit to 6.8% Ow ners 8.1% Cost of Goods Sold 76.0% 3

14 Profitability All Participating Pharmacies Top 25% Payroll Expenses 9.1% Other Operating Expenses Profit to 6.8% Ow ners 8.1% Payroll Expenses 6.7% Other Operating Expenses 6.1% Profit to Ow ners 14.8% Cost of Goods Sold 76.0% Cost of Goods Sold 72.4% Productivity Sales Per Employee $500,000 All Pharmacies vs. Top 25% $400,000 $300,000 $200, $100,000 $0 All Pharm acies Top 25% Productivity Sales Per Employee All Pharmacies vs. Top 25% By Sales Category $500,000 $500,000 $400,000 $400,000 $300,000 $200, $300,000 $200, $100,000 $100,000 $0 $0 All Pharm acies Top 25% Unde r $1.5m $1.5 to $2.5 to $2.5m $4m Over $4m 4

15 Payroll Costs Are Increasing Payroll Expenses Excluding Owners 12.0% 8.0% 8.1% 8.7% 9.1% 7.2% 6.7% 4.0% 0.0% : Top 25% 2003: Top 25% What Happens As Sales Increase? $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 Median Sales $5,623,855 $3,100,275 $1,993,493 $1,132,308 $0 Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Gross Profit Margin Decreases 28.00% 27.00% 26.00% 26.9% 25.00% 24.00% 23.00% 22.00% 23.5% 22.6% 24.3% 21.00% 20.00% Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m 5

16 Operating Expenses Decrease 10.00% 8.4% 7.50% 6.9% 5.7% 6.8% 5.00% 2.50% 0.00% Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Payroll Expenses Increase 12.00% 8.00% 9.1% 7.9% 8.2% 11.0% 4.00% 0.00% Unde r $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m And Owner s Discretionary Profit Percentages Decrease 10.00% 9.8% 8.1% 8.1% 7.50% 6.0% 5.00% 2.50% 0.00% Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m 6

17 But Profit Dollars Increase! Owner's Discretionary Profit Dollars $400,000 $359,935 $300,000 $200,000 $100,000 $97,216 $161,364 $250,465 $0 Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Take The Acid Test Assess Where you are now Compare Yourself with others Identity Your strengths and weaknesses Develop Goals and action plans Team up With other pharmacists Evaluate Your progress Strategize With your planning team Try Again and again 7

18 NCPA-Pfizer Pfizer Digest: Executive Summary and Management Tool OTC Categories Presented by: David Wendland, VP Hamacher Resource Group Today s OTC market Consumer needs Purchase trends Product proliferation Product innovation Market outlook Pharmacist s role OTC category performance 2004 versus 2003 trends Independent versus chain sales Private label influence New items performance NeverOuts importance 1

19 OTC categories - Digest insights New items continue to drive OTC category growth Out-of-stock situation not improving across industry Majority of shoppers are neglecting the front-end of pharmacy OTC categories - Digest content Analgesics Antacids/Laxatives Cough/Cold Diabetes Care Eye/Ear Vitamins Smoking Cessation Putting it to use Product info 38.71% Average average gross gross profit for margin category 1,748 Number total of items within available category items 78 Number NeverOuts of products NeverOuts Cough/Cold 8% Importance private label of private label 2

20 Putting it to use Placement info Cough/Cold Position Sub-category close to pharmacy breakdowndue to Rx-to-OTC Physical location Allergy/sinus of department items Typical represent user 25% profile of space Putting it to use Pricing info Cough/Cold Lip Gross preparations margin have for category the highest average Sub-category gross margin profitability for the category % Average retail Nasalcrom price comparison costs more in Chicago than Definition Philadelphia of category strategy Putting it to use Promotion info Cough/Cold Seasonal Peak cold trends and flu and season influences is October Secondary through March merchandising however allergies locations and asthma occur year round 3

21 OTCs and the front shop: Opportunity knocking! NCPA-Pfizer Digest: Executive Summary Questions. Now or later. Dave Wendland

22 Financial Benchmarking presented by Steven C. LeFever, Chairman Business Resource Services

23 About Business Resource Services, Inc. And Their Work With NCPA Business Resource Services, or BRS, specializes in financial management education for the owners and managers of independent businesses. The BRS team includes leading speakers and consultants in the area of small business finance, with backgrounds in banking, finance, accounting and business start-ups. BRS' clients include some of the world s largest and most successful associations, corporations and banking institutions, including the National Community Pharmacists Association, the International Franchise Association, the American Rental Association, Anheuser-Busch, Chase Manhattan Bank and Harley-Davidson. 1. Education 2. Information The BRS Three Legged Stool: 3. Implementation NCPA has partnered with BRS to assist in the development of a comprehensive financial management process PROFIT MASTERY designed to strengthen and develop members financial decision-making resources as a means for improving their profitability. The process includes: 1) Education: Practical, hands-on seminars in financial analysis, profit planning, pricing techniques, capital needs forecasting and strategic business planning 2) Information: Preparing the Financial Benchmarks section of the Digest, identifying key financial performance issues affecting profitability and cash flow and establishing benchmarks for measuring future improvements 3) Implementation: BRS facilitated peer groups called Performance Groups use financial benchmarking to develop goals, implement action plans and improve their financial success BRS,

Steven C. LeFever Chairman 200 First Avenue West Suite 301 Seattle, WA 98119 (206) 284-5102 (Telephone) (206) 282-4092 (Fax) lefever@brs-seattle.

24 Steven C. LeFever Chairman 200 First Avenue West Suite 301 Seattle, WA (206) (Telephone) (206) (Fax) ( ) (website) Steve LeFever is a national leader in the development of practical financial programs and training for the independent business community. His dual role as a successful entrepreneur and as a commercial banker gives him a unique perspective on financial analysis, business management and practical business decisions. Steve is a successful entrepreneur in his own right having founded several successful companies. As an officer at Seattle First National Bank, Steve was a key figure in developing the most successful Business Advisory Services Group of any bank in the nation, tailoring financial services and training to the needs of small and mid-size companies. In 1983, Steve founded his current firm, Business Resource Services (BRS), to further design, develop and deliver practical financial training to the independent business community. Currently BRS' services are in high demand by over 100 commercial banks, a variety of industry trade groups and major U.S. corporations, including Anheuser-Busch, Ace Hardware and Harley Davidson. Steve was instrumental in developing NCPA s Profit Mastery for Pharmacy financial management programs. Recognized by NCPA, state pharmacy associations and industry buying groups as a top-rated speaker, Steve brings a valued perspective and insight to the podium. His unique teaching techniques focus on developing practical financial skills as decision-making tools, and the response to his programs nationwide has been overwhelming. In addition, his presentation style is an extremely effective combination of information, motivation and entertainment. Steve earned his Master's Degree in Business Administration at the University of Washington in Seattle and has served as a management consultant for over fifteen years. He is a contributing writer to a variety of trade journals and is a frequent speaker for national associations. His particular consulting interests lie in managing capital and cash flow in startup businesses and growth management. BRS,

25 Why Benchmark? What Gets Measured, Gets Managed. This Year s Digest Includes Financial Benchmarks For These Key Financial Performance Issues Critical Area Profitability Productivity Financial Position Cash Flow Key Words Sales, Margin and Expense Control People and Facilities Asset Management/Controlling Debt Working Capital Cycle Financial data is presented for All Companies The Top 25% (based on owner s discretionary profit percentage) Sales Categories Geographic Regions High versus Low Third Party Prescriptions Metropolitan versus Rural Locations The Guide To Benchmarking Available at Includes The Financial Cause and Effect Road Map and Suggested Action Plans For These Same Critical Areas Profitability Productivity Financial Position Cash Flow Also in the Guide To Benchmarking What To Do Next A step-by-step approach for integrating financial benchmarking into your management process BRS,

26 A Look At The Most Profitable Pharmacies The Top 25% And Owner s Discretionary Profit Percentage OWNER S DISCRETIONARY PROFIT % = Net profit before tax plus owner compensation Sales Median Owner s Discretionary Profit Percentages 10.5% Top* 25% Median 7.5% 5.0% Bottom 25% *When we refer to the top 25%, we re including the results for all of the companies earning more than 10.5 percent in owner s discretionary profit Highlights Median sales increased by 13.0 percent (from $2,529,623 in 2002 to $2,857,981 in 2003). The trend of rising payroll expenses continued, increasing by 0.4 percent to 9.1 percent of sales. Gross margin improved by 0.5 percent (from 23.5 percent in 2002 to 24.0 percent in 2003) offsetting the increasing payroll expenses While average owner s discretionary profit percentages were unchanged at 8.1 percent of sales for both 2002 and 2003, increasing sales drove owners discretionary profit dollars up by 11.5 percent (from $195,901 in 2002 to $218,390 in 2003). Notes: BRS,

27 Long Term Trends $4,000 $3,000 $2,000 $1,000 AVERAGE ANNUAL SALES (IN THOUSANDS) PER PHARMACY LOCATION $1,269 $1,339 $1,442 $1,649 $1,746 $1,967 $2,296 $2,480 $2,855 $3,244 $ AVERAGES OF PHARMACY OPERATIONS, 10-YEAR TRENDS Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of Goods Sold Gross Profit 28.1% 27.6% 26.3% 25.6% 24.9% 24.0% 23.3% 23.0% 23.5% 24.0% Payroll Expenses (Excluding Owners) 10.1% 9.5% 8.8% 8.3% 8.2% 7.9% 7.8% 8.1% 8.8% 9.1% Owner Compensation Other Operating Exp Total Expenses 25.1% 24.5% 23.3% 22.5% 21.8% 20.4% 20.1% 19.4% 19.7% 20.0% Net Profit 3.0% 3.1% 3.0% 3.1% 3.1% 3.6% 3.2% 3.5% 3.8% 4.0% Add: Owner Comp 5.1% 5.2% 4.8% 4.8% 5.0% 4.9% 4.4% 4.4% 4.3% 4.1% Owner s Discretionary Profit 8.1% 8.3% 7.8% 7.9% 8.1% 8.5% 7.6% 7.9% 8.1% 8.1% BRS,

28 PROFITABILITY Average for All Pharmacies Average for Top 25% Payroll Expenses 6.7% Other Operating Expenses 6.1% Profit to Owners 14.8% Cost of Goods Sold 72.4% The top 25% had % More in Profit to Owners (14.8 percent compared to 8.1 percent) % Less COGS (72.4 percent compared to 76.0 percent) % Less Payroll Expenses (6.7 percent compared to 9.1 percent) % Less Other Operating Expenses (6.1 percent compared to 6.8 percent) Notes: BRS,

29 Productivity Efficient Use of People Sales Per Employee All Pharmacies vs. Top 25% By Sales Category $500,000 $500,000 $400,000 $400,000 $300,000 $200, $300,000 $200, $100,000 $100,000 $0 All Pharmacies Top 25% $0 Under $1.5m $1.5 to $2.5m $2.5 to $4Mm Over $4m As your sales grow, what expectations should you have for productivity (as measured by the sales per employee ratio)? How could you use this information to determine how many employees you should have? Based on the table below, describe the three-year trend for payroll expenses (excluding owners). Payroll Expenses Excluding Owners 12.00% 8.00% 8.1% 8.7% 9.1% 7.2% 6.7% 4.00% 0.00% Top 25% 2002 Top 25% 2003 What is the significance of the payroll expense percentage for the top 25%? BRS,

30 Financial Position Asset Management and Controlling Debt Ratio Computation All Pharmacies Top 25% Sales to Sales Assets Assets For 2003 the median participant generated $5.56 in sales for every dollar invested in assets. For the three years presented have the companies participating in the Digest become more or less efficient at managing their assets? Controlling Debt Ratio Computation All Pharmacies Top 25% Debt To Worth Total Liabilities Net Worth Return On Investment Owner s Discretionary Profit Net Worth 72.7% 72.6% 64.8% 100.7% 101.0% For 2003, the median participant had 56 cents in debt for every dollar invested by owners. For the three years presented have the companies participating in the Digest become more or less risky? Notes: BRS,

31 Cash Flow Managing the Working Capital Cycle BRS,

32 Sales Volume Analysis As Sales Increase... $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 Median Sales $3,100,275 $1,993,493 $1,132,308 $5,623,855 $0 Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Gross Profit Margin Decreases 28.00% 27.00% 26.00% 25.00% 24.00% 23.00% 22.00% 21.00% 20.00% 26.9% 23.5% 24.3% 22.6% Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Notes: BRS,

33 Operating Expenses Decrease 10.00% 8.4% 6.9% 7.50% 5.7% 6.8% 5.00% 2.50% 0.00% Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Why do you think operating expenses go down (as a percentage of sales) as sales increase? Why do you think operating expenses went up (as a percentage of sales) for companies with sales over $4 million? Notes: BRS,

34 Payroll Expenses Increase 12.00% 8.00% 9.1% 7.9% 8.2% 11.0% 4.00% 0.00% Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m Which sales group was the most efficient at managing payroll expenses? Which sales group was the least efficient at managing payroll expenses? Why do you think pharmacies with sales over $4 million had such high payroll expenses? Notes: BRS,

35 What do these charts tell you? 10.00% 7.50% 5.00% 2.50% Owners Discretionary Profit Percentage 9.8% 8.1% 8.1% 6.0% Owner's Discretionary Profit Dollars $400,000 $359,935 $300,000 $250,465 $161,364 $200,000 $97,216 $100, % Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m $0 Under $1.5m $1.5 to $2.5m $2.5 to $4m Over $4m In comparing the top 2 groups, insert the words higher or lower to make the statement true about pharmacies with sales over $4 million. They have gross profit margins. They have payroll expenses (as a percentage of sales). They have operating expenses. Even though they have owner s discretionary profit percentages, since the percentage is applied to a sales amount, they end up with owner s discretionary profit dollars. Notes: BRS,

36 What To Do Next Take the Acid Test Assess Where you are now Compare Yourself with others Identify Your strengths and weaknesses Develop Goals and action plans Team up With other pharmacists Evaluate Your progress Strategize With your planning team Try Again and again BRS,

37 NCPA Pfizer Digest: Executive Summary and Management Tool Learning Assessment Questions: 1. Never Outs are key items that belong in stock at all times. a. True b. False 2. Cough/Cold is the number OTC category for independents. a. True b. False 3. Retail pricing is about the same for OTC items across the US. a. True b. False 4. Private label has become a key factor in most OTC categories. a. True b. False 5. Nearly three-quarters of all consumers prefer to self medicate. a. True b. False 6. The number of prescriptions dispensed per day in independent community pharmacies increased from 2002 to 2003, according to the NCPA-Pfizer Digest. a. True b. False 7. Most independent community pharmacy owners do not have access. a. True b. False 8. A majority of the independent community pharmacy websites allow patients to place a refill prescription order through the website a. True b. False 9. A majority of community pharmacists offer delivery services. a. True b. False 10. Net profit of community pharmacists significantly decreased from 2002 to 2003 a. True b. False

38 NCPA Pfizer Digest: Executive Summary and Management Tool Learning Assessment Answers: 1. True 2. True 3. False 4. True 5. True 6. True 7. False 8. True 9. True 10. False

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