INDUSTRY OVERVIEW

The information that follows was taken from this report: IBIS World Industry Report OD5706 Compounding Pharmacies in the US, dated January 2015 by Sarah Turk. A copy of this report can be found on this site, and we encourage all interested parties to read it closely.

In 2015 there were over 5,500 compounding pharmacies in the US that were estimated to generate over $5.5 billion of revenue and $1.5 billion in profits. Compounding has historically been very profitable, with high gross margins on product sales.

Industry Definition

This industry includes stores that make and sell compounded medications that are not commercially available. Compounded medications are prescriptions that are prescribed and written by physicians and prepared by pharmacists for individual patients.

Executive Summary

Compounded medications can assist patients’ compliance with their medication due to offering medication tastes, routes of administration, and medication dosages that are not otherwise commercially available. Moreover, the burgeoning elderly population has stimulated demand for prescriptions, including compounded medications that were customized to address a patient’s needs. The industry has also benefited from pharmaceutical manufacturers having drug shortages, enabling the industry to access raw materials and supply medication orders to patients and hospitals. As group purchasing organizations (“GPOs”), which secure supplies for healthcare providers, control about 72% of purchases made by hospitals, according to the Healthcare Supply Chain Association, drug shortages have occurred. Due to GPOs using their market share as leverage to secure low-cost contracts with pharmaceutical manufacturers, some drug makers have not had the incentive to manufacture and stock essential drugs.

Key External Drivers

  1. Regulation: The FDA is encouraging large-scale operators to register with the FDA and significantly increasing federal regulation. As healthcare providers are increasingly purchasing compounded medications from FDA-registered and regulated facilities, many operators will choose to comply with regulations to bolster revenue volumes.
  2. Number of adults aged 65 and older: As the US population ages, demand for various pharmaceutical products increases. Adults aged 65 and older are more likely to have chronic illnesses than younger demographics, which stimulates demand for prescriptions. Additionally, elderly individuals may require compounded prescriptions to have personalized dosage forms, flavors or medications that comply with their allergies. The number of adults aged 65 and older is expected to grow at an annualized rate of 3.4% during the five years to 2020.
  3. Increase in Number of Physician Visits: Consumers who visit doctors more frequently tend to receive more prescriptions and, in turn, purchase more medications. Therefore, patients may require compounded prescriptions to access drug strengths and forms that are not commercially available. The number of physician visits is expected to increase over the next five years.
  4. Per capita disposable income determines consumers’ ability to purchase this industry’s products: While prescription products can be essential for health and therefore less susceptible to changes in consumer discretionary spending, some of the industry’s offerings, such as medicine flavorings, are subject to changes in disposable income. An increase in disposable income will boost demand for compounding pharmacies. Per capita disposable income is expected to increase over the next five years.
  5. Number of pets (cats and dogs): In addition to developing drug formulations for humans, compounding pharmacies also create specialized drugs compounded for animals. The number of pet owners is expected to grow at an annualized rate of 2.3% during the five years to 2020. Because of this growth, more pet owners will obtain compounded drugs to increase their pet’s compliance with medications, demanding compounded drugs to cater to their pets’ individualized needs such as allergies and complications with the drug’s route of administration.
  6. Pharmaceutical awareness: During the past five years, many Americans have purchased pharmaceuticals to treat their health ailments. According to the Pharmaceutical Research and Manufacturers of America, about 3.6 billion prescriptions are dispensed in the United States each year. The US Pharmacopeia Convention estimates that 30 to 40 million of those prescriptions are compounded medications. Numerous trends have increased patient utilization rates of compounded medications. Moreover, as more patients addressed their allergies to certain drugs and their medication preferences, such as medication that have a different dosage strength, route of administration or flavoring than drugs that were commercially available, demand for compounded medications has increased.

The industry is expected to grow faster than economy at 2.6%/year through 2020 to $6.4 billion, with profit expected to increase slightly from 26.5% to 27.1% due to higher sales offsetting a higher cost of compliance.