Health (3 of 3)

Pharmacy and diagnostics

About 8 minutes to read in full, or 1 minute for the short version belowFacts checked 1 October 2026

In one minute

Distributors deliver medicines to pharmacies, pharmacies dispense them to patients, and labs and imaging centres run the tests doctors order.

The big idea: Medicines move from maker to wholesaler to pharmacy to patient, but the money mostly comes from insurers and governments, who set what the pharmacy is paid. Distributors and pharmacies earn thin margins on enormous sales, so gross profit per prescription and scale decide who survives, while labs and scanners are high fixed-cost machines whose profit depends on how many tests they run.

One unit, in numbers: One generic prescription at a US retail pharmacy: USD 25 comes in, and USD 3 (12%) is left after its own costs.What is left is the unit's contribution, before the costs of the whole company. See the worked example
Typical margin: About 1 to 2 percent for drug distributors, about 4 percent for pharmacy chains, about 14 percent for large lab chainsRoughly how much of every 100 of sales (or income) is left as profit after the running costs. More on margin
Capital intensity: MediumA fair amount of money is tied up, in things like stores, stock or equipment. More on capital intensity
The number to watch: Prescriptions filledThe number of prescriptions dispensed, often counted in 30-day equivalents.

Ask this first in a case

Who pays (insurer, government, middleman or patient), and who sets the price per prescription or test?

Words used above (4)

Prescription (Rx):: A medicine that needs a doctor's order before a pharmacy can dispense it.
Generic:: A copy of a medicine sold after its patent expires, usually much cheaper.
Wholesaler or distributor:: A company that buys medicines in bulk and delivers them to pharmacies and hospitals.
Imaging:: Pictures inside the body from X-ray, ultrasound, CT and MRI machines.

The industry's other words are explained in Words to know (12).

On this page (17 sections)

How money is made

Distributors earn a small margin on each medicine they buy and deliver, plus fees for services to drug makers and pharmacies.
Pharmacies earn the gap between what payers reimburse for a medicine and what it cost them, plus a dispensing fee where one is paid.
Pharmacies also sell over-the-counter medicines, beauty and everyday goods at higher margins, and earn fees for services such as vaccinations.
In the United States, pharmacy benefit managers earn fees from plans and keep part of the discounts they negotiate from drug makers.
Labs and imaging centres are paid per test or scan by insurers, governments or patients.
Machine makers earn most of their diagnostics profit on reagents and service contracts for the analysers they place.

Worked example: one unit

Unit economics means the money in and out for one unit of the business. Start from the revenue, take away the unit's own costs, and what is left is its contribution. More on unit economics

The unit: One generic prescription at a US retail pharmacy. Illustrative, rounded figures.
Line	Amount	ShareShare of revenue
Reimbursement from the payer, including the patient's copay	USD 25	100%
Minus Cost of the medicine	USD 7	28%
Minus Pharmacist and staff time, labels and packaging	USD 11	44%
Minus Share of store rent and overheads	USD 4	16%
What is left (contribution)	USD 3	12%

Check: USD 25 minus USD 22 of costs leaves USD 3.

So what: The pharmacy keeps USD 3 on a USD 25 prescription. A USD 2 cut in reimbursement takes two thirds of that, which is why reimbursement per script, the cost to fill each one and paid services matter more than sales growth.

Key measures(8)

Key measures (also called KPIs, key performance indicators) are the numbers people in this industry track. Ask for the first one or two early in a case.

Prescriptions filled
The number of prescriptions dispensed, often counted in 30-day equivalents.
Typical: About 1.81 billion at CVS in 2025, up 5.4 percent[1]
Gross profit per prescription
What the pharmacy is paid for a prescription minus what the medicine cost it.
Generic dispensing rate
The share of prescriptions filled with generic medicines.
Typical: Generics and biosimilars were about 90 percent of US prescriptions but about 12 percent of spending in 2024[5]
Reimbursement rate
What payers pay the pharmacy for each medicine; falling rates are called reimbursement pressure.
Front-of-store sales
Sales of non-prescription goods such as beauty and everyday items, usually at higher margins.
Requisitions (test orders) and revenue per requisition
How many test orders a lab handles and what each brings in.
Typical: Quest's organic requisitions grew 3.4 percent in 2025, with revenue per requisition up 0.1 percent[7]
Scanner utilization
The share of opening hours an imaging machine is in use.
Turnaround time
How long a lab takes from sample to report.

First questions to ask

When a case lands in this industry, these questions get you to the numbers that matter.

Who pays (insurer, government, middleman or patient), and who sets the price per prescription or test?
What is the mix of generic, branded and front-of-store sales, and the gross profit on each?
How have reimbursement rates and volumes moved?
For labs and imaging: how many tests or scans, at what price, against what capacity?
What rules limit who can own a pharmacy, sell online or set prices in this country?

Value chain: where the margin sits

The value chain is the steps a product or service passes through, from the first supplier to the customer. Each step below shows how much of the value it keeps. More on value chains

Step 1: Make the medicine: branded (patent protected) and generic copies
Fat margin
Pharmaceutical companies and generic makers (covered in the medicines brief)
Branded makers keep most of the value of a patented medicine.
Step 2: Distribute: buy in bulk, store and deliver daily to pharmacies and hospitals
Thin margin
McKesson, Cencora and Cardinal Health (US); Phoenix and Alliance Healthcare (Europe); Zuellig Pharma and DKSH (Asia); thousands of stockists in India
McKesson kept about 3.6 percent of revenue as gross profit in its year to March 2026.
Step 3: Manage the drug plan: decide which medicines are covered and what pharmacies are paid
Margin varies
US pharmacy benefit managers (CVS Caremark, Express Scripts, OptumRx); public insurers and health ministries elsewhere
The three largest US PBMs processed nearly 80 percent of US prescriptions in 2023.
Step 4: Dispense: check the prescription, advise the patient, hand over the medicine
Thin margin
Pharmacy chains, independent pharmacies, hospital pharmacies, mail order and online pharmacies
CVS Health's pharmacy and retail segment earned an adjusted operating margin of about 4 percent in 2025.
Step 5: Collect samples: collection centres and home visits
Margin varies
Lab chains' own centres, partner clinics and pharmacies
Step 6: Test and scan: run samples on analysers, take X-ray, CT and MRI images
Medium margin
Lab chains (Quest, Labcorp, Synlab, Dr Lal PathLabs) and imaging centres (RadNet, hospital groups)
Quest Diagnostics earned an operating margin of about 14 percent in 2025.
Step 7: Supply analysers and reagents to the labs
Fat margin
Roche, Abbott, Siemens Healthineers, Danaher (Beckman Coulter)
The analyser is placed cheaply and the profit comes from reagents used in every test.

Profit pool: who keeps the money

Where in the value chain the profit ends up, which is often not where most of the sales are. More on profit pools

Little of the profit on a medicine stays with distributors and pharmacies, which win by scale, speed and cost control, and in the United States the middlemen who run drug plans hold much of the pricing power. Diagnostics keeps more of each dollar, especially large lab networks with full machines and the equipment makers who earn on every test their reagents run.

Cost structure(5)

The main costs, each as a share of revenue (the money from sales).

Cost of medicines bought (distributor): About 96 percent of revenue at McKesson[2]
Distributor operating costs: About 2 percent of revenue at McKesson[2]
Operating profit left (distributor): About 1.5 percent at McKesson[2]
Operating profit left (pharmacy chain): About 4.3 percent adjusted at CVS Health's pharmacy and retail segment[1]
Operating profit left (lab chain): About 14 percent at Quest Diagnostics[7]

Benchmarks(5)

Typical figures for the industry, to check a client's numbers against.

Gross margin, McKesson (year to March 2026): About 3.6 percent on USD 403.4 billion of revenue[2]
Adjusted operating margin, CVS Health pharmacy and retail segment (2025): About 4.3 percent on USD 139.4 billion of revenue[1]
Operating margin, Quest Diagnostics (2025): About 14.1 percent on USD 11.04 billion of revenue[7]
Share of US prescriptions processed by the three largest PBMs (2023): Nearly 80 percent[6]
Pharmacies in Germany (30 June 2026): 16,488, down 113 in six months[9]

Typical cases(7)

Case prompts you might hear in this industry.

A US pharmacy chain's profit fell 20 percent while its sales rose. Why?
Should a Saudi pharmacy chain open 200 more stores?
Should an Indian lab chain match a rival's 20 percent price cut?
A European pharmacy group wants to sell prescriptions online. Should it?
How should a hospital group get more out of its imaging centres?
A drug distributor wants to grow profit faster than sales. Where should it look?
A chain wants to close 10 percent of its stores. Which ones, and what happens to their prescriptions?

Common traps(6)

Mistakes candidates make in this industry, and what to do instead.

Reading sales growth from expensive branded medicines as profit growth. Gross profit per script may barely move.
Ignoring the payer: in the United States the PBM, in Europe the law, in India the patient's own pocket.
Assuming online is cheaper without counting delivery and the rules on prescriptions.
Matching a lab price cut without working out the extra volume needed to stand still.
Giving medical advice. Stay with the business questions.
Reaching for a generic framework instead of the real driver of this industry. Instead, work out gross profit per prescription (or contribution per test), the volume and the fixed capacity, and ask which one moved.

What changed, 2024 to 2026(7)

Recent changes a case could turn on.

US drugstores shrank: Rite Aid filed for bankruptcy a second time in May 2025 and closed all its stores, moving prescription files from over 600 locations to CVS and other chains.[4]
Walgreens Boots Alliance was taken private by Sycamore Partners on 28 August 2025 for USD 11.45 a share in cash plus a right to up to USD 3 more, and its five businesses (Walgreens, The Boots Group, Shields Health Solutions, CareCentrix and VillageMD) now run as separate standalone companies.[3]
Volume moved to the survivors at lower pay per script: CVS filled 5.4 percent more prescriptions in 2025, helped by Rite Aid files, while reporting continued reimbursement pressure.[1]
Specialty medicines swelled distribution: McKesson's revenue rose 12 percent to USD 403.4 billion in its year to March 2026, with its oncology and multispecialty business up 31 percent, helped by acquisitions.[2]
Germany's pharmacies kept closing (16,488 at 30 June 2026) while mandatory electronic prescriptions from January 2024 opened the door to online pharmacies; Redcare's German prescription sales rose 191 percent in early 2025.[9]
India pushed cheap generics: government Jan Aushadhi stores grew from about 84 in 2014 to more than 19,200 in 2026.[12]
US lab payments were protected again: in February 2026 Congress delayed cuts to Medicare's lab fee schedule to 2027, while Quest grew revenue 11.8 percent in 2025, with organic test orders up only 3.4 percent.[8]

Players by region(6)

Well-known companies in each region. You do not need to learn them by heart; they help you picture the market.

Global: McKesson, Cencora and Cardinal Health (distribution)
AS Watson (health and beauty chains)
Quest Diagnostics, Labcorp, Sonic Healthcare, Synlab and Unilabs (labs)
Roche, Abbott and Siemens Healthineers (lab machines)
United States: CVS Health
Walgreens (private since August 2025)
Walmart and Kroger pharmacies
Amazon Pharmacy
CVS Caremark, Express Scripts and OptumRx (PBMs)
RadNet (imaging)
Europe: Boots (UK)
Redcare Pharmacy and DocMorris (online)
Phoenix and Alliance Healthcare (distribution)
Synlab, Unilabs and Cerba (labs)
Middle East: Nahdi and Al-Dawaa (Saudi Arabia)
Aster and Life Pharmacy (UAE)
PureHealth labs (UAE)
Al Borg Diagnostics
India: Apollo Pharmacy
MedPlus
Tata 1mg, PharmEasy and Netmeds (online)
Jan Aushadhi government generic stores
Dr Lal PathLabs, Metropolis and Thyrocare (labs)
Southeast Asia: Watsons and Guardian
Mercury Drug (Philippines)
Kimia Farma (Indonesia)
Zuellig Pharma and DKSH (distribution)
Prodia (Indonesia) and Pathlab (Malaysia)

Words to know(12)

Linked words have a fuller entry in the glossary.

Prescription (Rx): A medicine that needs a doctor's order before a pharmacy can dispense it.
Over the counter (OTC): A medicine sold without a prescription.
Generic: A copy of a medicine sold after its patent expires, usually much cheaper.
Wholesaler or distributor: A company that buys medicines in bulk and delivers them to pharmacies and hospitals.
Reimbursement: What an insurer or government pays the pharmacy for a medicine.
Copay: The share of the price the patient pays.
Pharmacy benefit manager (PBM): A US middleman that runs drug plans for insurers and employers and sets what pharmacies are paid.
Front of store: The non-prescription part of a pharmacy: beauty, snacks and household goods.
Requisition: An order for one or more lab tests for a patient.
Reagent: A chemical used up in each lab test.
Imaging: Pictures inside the body from X-ray, ultrasound, CT and MRI machines.
Turnaround time: How long a lab takes to return a result.

Business model patterns

The ways of making money this industry follows. Spot the pattern in a new industry and you already know the first questions to ask.

Sources(12)

Facts checked on 1 October 2026. Worked examples are illustrative, shaped by these sources rather than one company's figures.

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