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DRUG WHOLESALER SALES GROW 14% TO $ 22.19 BIL. IN 1988, NWDA "OPERATING SURVEY" FOR THE YEAR REPORTS; HOSPITAL CUSTOMERS' SHARE INCREASES TO 22.8%

Executive Summary

Sales by the drug wholesale industry "grew by 14% in 1988 to $ 22.19 bil.," the National Wholesale Druggists Association reported in its "Operating Survey" of industry business trends for the year. The NWDA survey allows for an estimated 4.1% inflation rate, rather than the approximately 9% drug price inflation rate in 1988, in concluding that the industry had "a strong real sales growth of approximately 9.5%." Real sales growth would still be an impressive 4%-5% if the 9% inflation rate for pharmaceuticals last year were taken into account. Hospital customers accounted for 22.8% of wholesalers' business in 1988, the survey reports. Hospitals' share of industry sales increased in 1988 from 22.2% in 1987. Chain warehouses also accounted for an increased share of 1988 industry sales (6.1%, up from 5%). However, the report notes that chain drug stores accounted for somewhat less than in 1987 (21.7%, down from 22.8%). Independent drug stores continued to provide the bulk of wholesaler business (44.2%), although the customer segment represented a smaller percentage than in 1987 (45.6%). The report discusses a number of anomalies. Two involve net profit after taxes. "Composite average numbers show a decline in net profit after taxes and return on net worth," the survey states. However, "median results show significant improvement in both measures." Furthermore, the association said, "the decline in net profit after taxes on a composite average basis is particularly puzzling because operating profit increased from 2.31% to 2.34% of sales" as the effective tax rate declined from 42.3% to 39.3%. According to NWDA records, 1988 "appears to be the only" year in which "an increase in operating profit has failed to produce a correlative increase in net profit after taxes." The association concluded that "other expenses" related to mergers and buyouts accounted for the anomaly. "Other expenses" jumped "sharply from 0.07% to 0.29% of sales for 1988," the report states. However, "on a median basis 'other expenses' was only 0.06%, indicating disproportionately high results in this area by a couple of firms -- perhaps the result of consolidation, acquisition or leveraged buyout expenses," NWDA said. Consequently, the association believes that because the "other expenses" do not apply to most firms, the industry has by and large "minimally held the line on net profit after taxes or more likely improved it." The report adds that an increase in interest expense from 0.56% to 0.62% "should not be enough" to have accounted for the slip in net profit. Total operating expenses dropped below the 5% mark for the first time ever. The measure "decreased from 5.28% of sales in 1987 to 4.99% in 1988," the survey found. The 0.29-percentage point (5.5%) decline "is about average over the past several years," the association reported. Several factors accounted for the gain in operating profit margin, the report states. "Gross margin saw its smallest relative decline in many years, dropping from 7.6% to 7.34% of sales. This is 0.26 percentage points (or 3.4%) lower than the 1987 gross margin of 7.6%." Inventory investment decreased from 51.7 days' sales in 1987 to 51.2 in 1988, the report states. "This rather modest improvement looks much stronger," NWDA added, in light of a 20% increase in the median distribution center's storekeeping units, from 19,900 to 23,900. Total asset turnover grew to 4.15 times in 1988. The industry's financial leverage also increased, as the "leverage multiplier increased to 2.42 times" in 1988 from 2.23 times the previous year.
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