Iranian Journal of Pharmaceutical Sciences Summer 2010: 6(3): 209-216ijps.sums.ac.ir

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Original Article

The Study of Profitability of Drugstores in Iran’s Pharmaceutical System

Mehdi Mohammadzadeh

Department of Pharmacoeconomics and Pharmacy Management,Faculty of Pharmacy, Shahid Beheshti University of Medical Sciences, Tehran, Iran

AbstractPharmacy as the last unit in the pharmaceutical supply chain is responsible for

supplying and dispensing medicines to the patients and giving required advices tothem, based on their needs and physician’s prescriptions according to standardprotocols of the country. Beside this responsibility, which is primarily on drugstores,this unit is regarded as a small business unit and should have economical feasibilityand acceptable profit, so that it’s main responsibility will not be negatively affectedby unfavorable economic situation. In this study, the profitability of pharmacies, incase they merely supply medicine and work out no other business, has been put intoconsideration. To carry out the research, case studies and interviews along witharchival reviews and historical records have been used and income statement of casepharmacies has been inspected. The results show that in the case that Iranianpharmacies simply supply medicines, they will be loss-baring and to improve themand increase their outcome some measures need to be taken. Some recommenda-tions have been offered in the discussion and conclusion section of this paper.

Keywords: Supply chain management; Income statement; Induced demand; Justicein health; Profitability; Pharmacy accounting.

Received: December 2, 2009; Accepted: March 1, 2010.

1. IntroductionEquality and accessibility of patients to

medicine is an important factor of justice inhealth and undoubtedly, pharmacies are one ofthe most important elements in this regard.Pharmacies are business units to providepatients required needs according to society'smedical and health basis and protocols.

Presentable services on pharmacies are

specific and defined, and the existing productshave special characteristics and defined prices,hence pharmacies are able to carry out thebusiness only within the standards in thecountry's medical system [1]. Customers ofthese units are patients and contacting thesekinds of clients requires specific behaviors,therefore, pharmacies are different from othersmall business units. This means that firstlycustomers are not the ones who select theproduct. It is primarily the physician whoprescribes the products or it is selected basedon the pharmacist’s advice. Secondly, the

*Corresponding author: Tel: (+98)21-88665692Fax:(+98)21-88200078E-mail:mehdi381@yahoo.com

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main part of the price of the products isusually covered by insurance companies orpension funds and government subsidizes inorder to adjust affordability of patients and tolet the low income patients to receive whatthey need. Thirdly, the current commercialactivities in the retailing like sales, tradediscounts, trade-in allowance, or sellingexpired medicine is illegal and pharmacies areresponsible for selling medicines understandard maintaining circumstances withinspecific period [2].

These small business units, therefore, musthave economic feasibility and reasonableprofitability. Calculating the profitability ofpharmacies is rarely studied and reportedscientifically. Most of the ideas are based ontheoretical judgments and personalobservations.

In generic pharmaceutical systems, dueto the fact that pharmaceutical marketing isperformed mainly on push mechanism,pharmaceutical companies tend to sell moremedicines using special tactics andconnections with pharmacies by persuadingthem to put their products in patient’smedicinal basket. The tactics which arecommon include giving discount, free samples,cash awards and gifts and prizes [2].

So far, in Iran, no survey has beenconducted about the effects of these actionson the quality of presentable pharmaceuticalservices. In the generic pharmaceutical systemof Iran, companies apply the similar strategies.Applying these strategies over the past fewyears has extensively and tremendously soaredleading the formation of a false belief thatgreater part of profits of selling medicine isallocated to the drugstores. Therefore,pharmaceutical companies in this competitivearea abandon considerable portion of theirprofits in order to sell more [3].

This subject has been brought up in officialgatherings to great extend so that manymanagers and decision makers in healthsystem have come to this belief and expressedtheir ideas in media and press and this hascaused a lot of conflicts between pharmacies

and pharmaceutical industries knowing thefact that these conflicts about profits candamage country’s health system seriously [4].

In this study, it has been tried to examinewhether Iran’s pharmacies in case of merelyselling medicines, are profitable or not andprovide solutions with analyzing the resultsabout involved agents in pharmaceutical supplychain and efficiency of pharmaceutical services.

1.1. Problem definitionPharmacy in Iran at the end of

pharmaceutical supply chain as a retailer anda small business unit (SBU) is responsible fordispensing medicines to the patients, directly.Therefore, face to face contact with clients andpatients is being carried out in these units.Pharmacist in drugstores is in liable to presentthe required information to the clients andprovide the needed advice. Thus in author'sview pharmacies are considered strategictechnical and business unit (STBU). Patients'expectation regarding this unit is receivingmedicine, consumption guideline and relatedservices. Since pharmacies' activities andresponsibilities with required quality is tightlyrelated to their economic situation, analyzingits profitability and evaluating whether thepharmacies have reasonable financial outputto be able to provide technical services ornot, is very useful to health system’s decisionmakers. Normally, from the view point ofpublic and governmental organizations,pharmacies seem as one of the most profitableunits; this vision occurs for three reasons:1- Seeing that pharmacy products do notcomprise significant prices, and many clientsrefer to pharmacies every day.2- According to the fact that prices are fixedin pharmacies, negotiation on prices orbargaining is impossible and patients aresupposed to pay the exact mentioned price. 3- Choosing products is normally not on thepatient but on whether the physician who hasprescribed the medicine or the pharmacistwho might give them some advice.

Therefore, because it is generallyconsidered that pharmacies are extremely

Profitability of drugstores in Iran

profitable, regularly the rules toughen theirbusiness and new pharmacies establishmentturn to be harder. However, increasing numberof pharmacies makes patients' accessibilitiesto the medicines easy and convenient besides,it prepares working opportunities to graduatesof pharmacy faculties, but in case thepharmacies have no enough profits, there isthe possibility of decline in technical servicesfor customers or perhaps some unreasonableprofitable activities might be carried out.

1.1.1. Research questionBased on problem definition, the research

question is drafted as followed: “Is supplying medicines in Iranian

pharmacies sufficiently profitable?”To answer this question, there are some

sub-questions that are required to be answeredwhich can lead us to find the final answer.

1.1.2.1.Sub questions1- What are the average costs of a pharmacy?2- How much profit does sale mark up andtechnical responsible fee bring for apharmacy?3- How much is the amount of sales per capitaof a pharmacy according to annual issuedprescription rate and whole market volume?

1.2. HypothesisAccording to the research question and

problem definition, the hypothesis of theresearch is drafted as followed:“If pharmacies merely supply medicines, willthey lose money?”

2. Literature reviewLimited studies have been conducted about

profitability of independent pharmaciesaround the world. This little carried outresearches show noticeable differences interms of profitability and consumer’s behaviorin Generic and Ethical systems. Independentpharmacies are able to attract customers andincrease their profitability using specialmarketing tactics. One of these ways isapplying tele-pharmacy systems. Studies have

shown that using tele-pharmacy in NorthDakota State brought on noticeableimprovement in pharmacies operation [5].

In a research, pharmacies output isconsidered based on gross and operationalprofit and effective factors on them in a fiscalperiod and has been proven that face to facemarketing has significant positive effect onprofitability of a pharmacy [6].

In addition to that pharmacy’s connectionwith telemedicine system in rural areas inU.S not only has caused a decrease in healthexpenses of public and avoided people’s wasteof time but has effected more referral to thepharmacies and has improved pharmacies’profitability [7].

While it seems that pharmacies can increasethe number of their customers throughattracting patients and providing value creativeservices, pharmacies outcome as a smallbusiness unit is not just regarded to the salesvolume and number of customers but isdepended upon several factors, and one of themost important ones is reimbursement period(payback time) from insurance and supportiveorganizations. U.S pharmacies, which workunder Medicare system, have lost around 4%of their profits regarding long period ofreimbursement in insurance system in 2006 [8].

Studies that are carried out in economicfield of pharmacies and their business successshow that several indexes as sales amount,medicine’s profit margin, reimbursementperiod, technical fee of pharmacist, paymentconditions to wholesalers or suppliers,inventory turnover and cash managementplay important roles in this regard [9].

What is not researched thoroughly is thatwhether in complete generic system whichsale amount of pharmacies is depended uponfactors like availability, price, geographicallocation, fast acting and variety of products,are pharmacies able to be profitable merely bydispensing medicines? We could not find areliable study in Iran in this regard and mostof found resources are related to pharmacist’sunions like Iranian Pharmacists Associationclaims and assertions.

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Many pharmacists and Iranian PharmacistsAssociation, as well as the author claim thatone of the reasons that preventspharmaceutical improvement and keepspatients unsatisfied from pharmacies in thiscountry is pharmacies’ low profitability andpharmacist’s dissatisfaction that leads to aconflict between pharmacies andpharmaceutical industry since pharmaceuticalcompanies which are always looking for someways to sell more and make more profit usingvarious methods to have more portion inpatients medicinal basket. The authorconsiders the DCFP (Distribution ChannelFriendly Practices) as one of the best ways toacquire more portions in shelves’ ofpharmacies, specifically in generic area whichchoosing medicine for prescription is onpharmacists. In order to increase theirprofitability, pharmacies, look for fast andgigantic distribution channels with highfinancial ability so they can progress theproducts circulation and improve paymentsconditions [10].

According to reviewed articles, it seemsthat one of the reliable methods to evaluatepharmacies’ financial operation and theirprofitability is study of balance sheet andincome statement [11]. In this study, theyhave been tried.

3. Research methodDue to our target society and minimizing

research bias, case study has been selected asthe most suitable research strategy and asample including 100 cases in 20 districts ofTehran have been defined randomly fordaytime pharmacies and none randomly for24-hour pharmacies. Therefore, in each districtfour daytime pharmacies and one 24-hourpharmacy have been studied and their financialoperations were put into consideration.

The approach of this study is descriptive-explanatory, and semi-quantitative methodhas been used, which information aboutdifferent costs of pharmacy such asoperational and overhead costs, rents,wastage, cost of expired medicines, and

administrative expenses have been collectedby questionnaires from the cases, then annualaverage expenses of a pharmacy in Tehran hasbeen estimated.

To obtain real sales amount of pharmacyfrom dispensing only medicines, with use ofarchival review and historical records andestimating total price of each existingprescriptions in Social Security Organizationsent by pharmacies, they have been sampledand average price of each prescription hasbeen determined and the profit of medicinesand income through technical services fee ofpharmacist according to Ministry of Healthand Medical Education instruction has beenestimated. Secondary data including amountof annual sale of domestic producedmedicines and imported part has beencollected from MoH annual report [12], andnumber of independent or hospitalpharmacies, obtained from Darupakhshdistributing company [13].

Content validity of questionnaire wasconfirmed by 10 expert pharmacists in anexpert panel. On the way to minimize thebias, along with sending questionnaire,interview method was applied as well andmore than 20 expert pharmacists werequestioned in this regard.

Despite of all the given efforts regardingthe difficulty of accessing detailed informationof pharmacies expenses, inventory turn overis not calculated. Besides according to law,insurance institutions are supposed to offer theprepayments to pharmacies one month inadvance. We assumed that this law has beenconformed and period of advance payment isthe same as reimbursement period and noloss for reimbursement rate is on pharmacies.

3.1. Study areaIn order to provide the possibility of face

to face interview, the study has beenconducted in Tehran province (differentdistricts of Tehran, Karaj and Varamin).

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4- Data presentation:A) Secondary data

1) Amounts of annual sale of domestic produced medicines by out hospital pharmacies 5,835,737,579,830 Rials

2) Amounts of annual sale of imported medicines by out hospital pharmacies 2,572,306,152,004 Rials

3) Number of out hospital pharmacies according to D.P. Distribution Co. report in whole of country 8985 Units

3) Domestic produced medicine sale profit margin 16.7 % 4) Imported medicines sale profit margin 8.5%5) Number of all prescriptions issued in 1384 in the country 666,667,2666) Average prescriptions price per capita 22,309 Rials 7) Percentage of expired medicines in pharmacies 1%8) Profit obtained by long term payment, discount,

offered by distributing companies….(percent in sale) 5%

B) Calculating pharmacy’s average gross profit per capita in 13841) Domestic produced medicines sale profit: 108,466,130 Rials 2) profit obtained by long term Purchase and discount 32,474,889 Rials 3) Imported drugs sale profit 24,334,560 Rials4) The profit of technical services fee of prescribed medicines 74,197,737 Rials5) Profits of technical service fee in over the counter drugs (OTC)5-1) Total sales of medicines by out hospital pharmacies 8,408,043,731,834 Rials 5-2) Total sale of prescribed medicines 5,949,066,666,667 Rials5-3) Total sale of OTC drugs 2,458,977,065,167 Rials5-4) Maximum profit of OTC sales (technical fee) 41,051,370 Rials Total gross income of pharmacy per capita 280,524,686 Rials

C) Calculating total average expenses of pharmacies per capita1) Staff paymentsTotal payment to responsible pharmacist including average salary of a pharmacist per year, Technical agent’s

settlement payments (year’s services payment after resignation), Employer’s share insurance and New Year’s extrapayment is 128,328,000 Rials

For estimating average payments to technicians first we determined average number of them working in onepharmacy, then through collected information from pharmacies and labor law of country average payment for eachpharmacy determined as below: 206,472,000 Rials

2) Area expensesTotal area expenses including monthly rentals amount, water, electricity, gas and telephone bills and ground tariffs

based on questionnaire data are: 130,000,000 Rials3) InsuranceTotal insurance expenses including accidents insurance and technical staff responsibility insurance are: 2,400,000 Rials4) WasteTotal waste including expired products, damaged products and man power based wastage is: 9,357,867 Rials5) TaxesTotal taxes which is about 2.5% of annual profit is: 9,949,372 RialsTotal costs of each pharmacy per capita 355,242,984 Rials

D) Calculating the operational profits or losses of pharmacy:(By comparing gross profits and expenses of pharmacy the below total is obtained)Profit (losses) of pharmacy (74,718,298) Rials

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With studying and comparing profits andexpenses of pharmacy, we realize that withmerely selling drugs not only pharmacies arenot profitable but also they will have losses.

5. DiscussionThe results show that if pharmacies in Iran

with defined margins and sheer volume ofmedicine consumption sell medicines onlyand avoid other sorts of pharmaceuticalbusinesses they will have losses. A pharmacy’sloss as an important unit in pharmaceuticaland health services supply chain can causeserious damages to the quality of healthservices and ultimately society’s health leveland quality of life.

Since limited level of pharmaceuticalconsumption in each country can be a sign ofsocial development, improved life style andwelfare, existing of low profitable pharmaciesor even disadvantageous ones are seriousdangers in this regard and is important barrierto achieving these goals. As a result, cheapmedicines or low price and sale margin morethan hurting pharmacies and pharmacists,might hurt society’s health by persuadinginduced demand. Therefore, in a condition thatmerely selling medicine brings on no profitsfor these small business units or even canimpose some losses, the improvements ofthis condition is unlikely in a short time,hence the best way to support pharmaciesincludes some new policies like giving somespecial commercial credits and privileges orcovering some legal expenses by governmentthat decision makers must consider themthoroughly.

6. RecommendationsAccording to the results of this study, the

following hints are advisable:1. Some items such as hygienic (skin cares),cosmetics, medical devices and foodsupplements should exclusively be sold inpharmacies and be prohibited to be sold inother commercial areas.

2. Some parts of tariffs or legal commitmentslike insurance or taxes should be forgiven bygovernment and this credit should be variableaccording to pharmacy’s effort to rationalizedrug consumption in society and persuadepatients and pharmacists to apply high qualitydomestic produced medicines instead ofimported ones. 3. Reasonable profitability of all the elementsin pharmaceutical supply chain from supplierto dispenser must put into decision makersconsideration so that the business units willnot be forced to amplify quantitative sellingto make profit, because it can increase drugconsumption chaos and abuse in society.

Acknowledgment The author tends to appreciate sincere

cooperation of friends and colleagues whohelped this to be done, especially Eng Ms.Fariba Ghaderi the director of StrategicResearch Center of TPICO and Dr. SogolSiah Makon chief expert of TPICO and MsSomaieh Sabokro expert of Rosamed Co. Itis hoped that these people’s help and all theothers who give an effort in applied researchsections qualify pharmaceutical system ofIran more and improve the quality of servicesprovided to people.

References [1] Iranian Food and Drug law. Approved by Iranian

parliament;1955.[2] Dogramatzis, D. Pharmaceutical marketing; A

practical Guide”, Taylor and Francis, 2002, pp.3-57.

[3] Mohammadzadeh M. Donyaie Daru Magazine.2009; Vol 8, TPICO press.

[4] Mohammadzadeh M, Ghaderi F. Present situationof Iranian pharmaceutical companies. DonyaDaru; 2007; TPICO Issuance.

[5] Khan S. Is there a successful business case for telepharmacy? Telemedicine E-Health J 2008; 14:235-44.

[6] Peterson CD. Dakota tele pharmacy project:restoring and retaining pharmacy in ruralcommunities. J Pharm Technol 2004; 20: 28-39.

[7] Bynum AB. The impact of telemedicine onpatients cost saving: some preliminary findings.

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Telemedicine E-Health J 2003; 9: 361-7.[8] Carrol NV. Establishing the impact of medicare

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[9] Wertheimer AI. The conflicts between thepharmaceutical industry and pharmacists. J PharmMark Manag 2008; 18:11-9.

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[11] Brucel ER. Maximizing profitability throughcommercially successful implementation of over-the-counter switches. J Generic Med 2008; 1:13-20.

[12] Ministry of Health of Iran. Iran PharmaceuticalData Book; MoH press, 2005.

[13] Darupakhsh Distribution Company. AnnualOperational Report, 2005.

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