A pharmacist displays boxes of Ozempic, a semaglutide injection drug used to treat type 2 diabetes made by Novo Nordisk, at a Rock Canyon pharmacy in Provo, U.S., March 29, 2023.
George Frey | Reuters
Drug manufacturers aren’t the only ones feeling the effects of the gold rush in the weight loss industry.
retailers with pharmacy establishments such as Walmart, Hooks and Rite Aidsaid increased demand for prescription weight-loss drugs helped boost sales for the second quarter.
But analysts note that these blockbuster treatments are minimally profitable for retail pharmacies — and may even come with margin headwinds.
“Lately, you’re starting to hear retailers talk about these drugs. But I wouldn’t say they’re necessarily the ones benefiting from the increased popularity,” CFRA Research analyst Arun Sundaram told CNBC. “They don’t really make a lot of profit from drugs. So it’s really just a traffic driver and not really a profit pool for retailers.”
Buzzy is like a drug New Nordisk‘s obesity injection Wegovy and diabetes treatment Ozempic have grown rapidly in popularity over the past year, with high-profile names such as billionaire tech mogul Elon Musk among end users.
These treatments are known as GLP-1, a class of drugs that mimic a hormone produced in the gut to suppress a person’s appetite.
Other drug manufacturers, e.g Eli Lilly and Pfizerare developing their own GLP-1 to take advantage of the weight-loss drug market, which some analysts predict could be worth $200 billion by 2030. About 40% of US adults are obese, making successful treatments a huge opportunity for drugmakers.
But the boom in demand for GLP-1s is also being felt in other parts of the drug supply chain, including pharmacies that dispense prescription drugs to patients.
Are weight loss drugs profitable?
Walmart CEO Doug McMillon said on Thursday’s earnings call that the company expects weight-loss drugs to help boost sales for the rest of the year: “We still expect some GLP popularity in food, consumables, and health and wellness. 1 medicine, to grow as only percent in the back half.”
Also in June, Rite Aid CFO Matthew Schroeder said the increase in pharmacy revenue was driven by increased sales of Ozempic and other GLP-1s. The company also decided to increase its full-year revenue guidance “due to increased sales volume in Ozempic and other high-dollar GLP-1s.” Schroeder was referring to the high price tags of GLP-1s, which range from about $900 to $1,300 in the United States.
He said those drugs have a high sales volume per prescription, but emphasized that the increased volume of GLP-1 had a “minimal impact” on Rite Aid’s bottom line.
Kroger CEO Rodney McMullen similarly said during an earnings call in June that the GLP-1 drug’s “sales dollars are far greater than margin dollars.”
“We would expect GLP-1-type drugs to continue, but keep in mind that the impact on profitability is quite narrow,” he said.
That’s because GLP-1s like Wegovy and Ozempic are brand-name drugs with “very, very low gross margins,” according to CFRA Research’s Sundaram.
He said retail pharmacies generate high sales for each GLP-1 prescription they dispense, but low profits, which slightly negatively affects the overall profits of retailers such as Walmart and Kroger.
UBS analyst Michael Lasser similarly pointed out that gross margins for Walmart’s US business “would look better without the contribution from GLP-1 drugs because these drugs carry very low margins.”
A selection of injector pens for the weight loss drug Saxenda are shown in this photo on March 31, 2023 in Chicago, Illinois, USA.
Jim Vondruska | Reuters
Gross margins for brand-name drugs average 3.5% for pharmacies, according to a 2017 study by USC’s Schaeffer Center for Health Policy and Economics. This means that it can be years before a brand-name drug contributes significantly to a pharmacy’s bottom line.
In contrast, the gross margin for generic drugs—the cheaper equivalents of brand-name drugs—is an average of 42.7% for pharmacies.
There are several reasons for the low margins of branded drugs. First, branded drugs do not compete directly with other drugs because they have patent protection. This gives drug manufacturers more power when negotiating drug discounts with wholesalers who buy the drugs and distribute them to pharmacies.
As a result, “there is little room for wholesalers and pharmacies to make large margins because they lack the power to negotiate,” according to the Affordable Medicines Association, a trade association representing manufacturers and distributors of generic prescription drugs.
What other impacts do retailers face?
But GLP-1 has other implications beyond the retail pharmacy business that need to be considered.
For companies like Walmart and Kroger, GLP-1 drugs can indirectly have a positive impact on other business categories.
That makes some analysts less concerned about the margin wind in pharma: “The overall margin wind is less risky for Walmart because any foot in the door often ends up with a lot of stuff in the cart,” KeyBanc analyst Bradley Thomas told CNBC.
“Walmart is generally not a quick store you go to on your way home,” he said. “They’re going to make a lot of purchases, and I think we’re seeing a lot of the discretionary categories see some improvement from that increased traffic they’ve been getting lately.”
Thomas added that GLP-1 drugs are only part of Walmart’s business: “If you were to list the most important things that drive Walmart’s strong sales performance right now, it probably wouldn’t be in the top ten,” he said.
It’s a slightly different situation for similar companies like Rite-Aid CVS Health and Walgreens.
These companies have retail pharmacies as well as other business segments that are directly affected in different ways by the GLP-1 drug boom.
For example, CVS also operates a health insurer and pharmacy benefit manager, or PBM, that maintains formularies and negotiates drug discounts with manufacturers on behalf of insurers and large employers.
Growing demand for GLP-1 drugs is likely more of a headwind for health insurers as they have to pay for expensive drugs for beneficiaries, but CVS says the “risk is manageable” in that business unit.
At the same time, PBMs may benefit more from increased GLP-1 use because they provide significant drug discounts and compete among manufacturers—but they often don’t pass all the savings on to insurers.
“Every type of business has GLP-1 and they affect them in different ways,” CVS CEO Karen Lynch said during an earnings call last month.