How pharmacies, drug distributors and diagnostics labs work
The chain from medicine maker to patient, who pays the pharmacy in different countries, how labs and imaging centres run, and the measures each one watches.
Industry brief, with a one-minute summary: Pharmacy and diagnosticsKey takeaways
- Medicines flow from the maker to a wholesaler to a pharmacy to the patient, but most of the money flows the other way from insurers and governments, often through middlemen.
- Prescriptions filled (scripts): the number of prescriptions dispensed, often counted in 30-day equivalents so that a 90-day supply counts as three.
- Gross profit per prescription: what the pharmacy is paid minus what the medicine cost it.
- Generic dispensing rate: the share of prescriptions filled with generics.
Key idea
Medicines flow from the maker to a wholesaler to a pharmacy to the patient, but most of the money flows the other way from insurers and governments, often through middlemen. Wholesalers and pharmacies handle enormous sales on thin margins: McKesson, a large US drug distributor, kept about 3.6 percent of its revenue as gross profit in its year to March 2026. Diagnostics is different: a lab or scanner is a high fixed cost, so profit depends on how many tests it runs and what each one is paid.
This module explains how the business of pharmacy and testing works. It is not medical advice: decisions about medicines and tests belong with doctors and pharmacists.
- From maker to patient
- Medicine makersBranded drug companies (patent protected) and generic makers (copies sold after patents expire)
- Wholesalers and distributorsBuy in bulk, store and deliver daily to pharmacies and hospitals: McKesson, Cencora, Cardinal Health (US); Phoenix, Alliance Healthcare (Europe); thousands of stockists in India
- Key: PharmaciesChains, independent shops, hospital pharmacies, mail order and online pharmacies
- PayersInsurers, government schemes and, in the US, pharmacy benefit managers (PBMs) that run drug plans for insurers and employers
- PatientGets the medicine and pays a share, or the full price where there is no insurance
Goods move down the chain; payment mostly comes from insurers and governments, and the patient pays a share called a copay or co-payment.
A pharmacy sells three things. Prescription medicines (often called Rx) need a doctor's prescription and bring most of the sales. Over-the-counter medicines (OTC), such as pain relief and cough syrup, can be bought without one. The front of the store sells beauty, personal care, snacks and household goods, usually at a higher margin. Many pharmacies also earn fees for services such as vaccinations and health checks.
| Region | Who pays most of the bill | How the pharmacy's pay is set | What this means |
|---|---|---|---|
| United States | Insurers and employers, through PBMs; government plans | Contracts with PBMs set a payment per drug plus a small dispensing fee | Pharmacies have little power on price; reimbursement keeps being squeezed |
| Germany and much of Europe | Public health insurance | Set by law: a fixed fee per prescription plus a small markup; ownership limited to pharmacists in many countries | Stable but capped pay; many small pharmacies; closures when costs rise |
| India | Mostly patients, paying from their own pocket | Price caps on essential medicines; chains and online sellers compete with discounts | Many small chemists; generics dominate; chains and online pharmacies are growing |
| Gulf states | Mandatory health insurance for many workers in Saudi Arabia and Dubai; government for citizens | Prices of medicines regulated by the state | Large chains with hundreds of stores grow with insurance coverage |
| Southeast Asia | A mix of patients and public schemes | Prices partly controlled; chains compete with independents and online | Health and beauty chains combine pharmacy and beauty shelves |
So-what
Before any pharmacy case, ask who pays and who sets the price. That decides whether the lever is volume, cost, mix or negotiation.
Diagnostics: labs and imaging
Diagnostics has two parts. Laboratories test samples such as blood and urine, from routine checks (blood sugar, cholesterol) to complex genetic tests. A large lab network works like a hub and spokes: many collection centres and home visits take samples, which travel to a few big central labs with automated machines. Imaging centres take pictures inside the body with X-ray, ultrasound, CT and MRI scanners. In both, the machines, the building and the trained staff cost the same whether the lab runs 2,000 tests a day or 4,000, so volume decides profit.
The machine makers (Roche, Abbott, Siemens Healthineers, Danaher's Beckman Coulter) often place an analyser in a lab cheaply, or lease it, and earn most of their money on the reagents and supplies used for every test. That is the razor and blade model: a cheap base and steady profit on repeat items.
Key measures, in plain words
- Prescriptions filled (scripts): the number of prescriptions dispensed, often counted in 30-day equivalents so that a 90-day supply counts as three.
- Gross profit per prescription: what the pharmacy is paid minus what the medicine cost it. This, not the sale price, is what pays for the pharmacist.
- Generic dispensing rate: the share of prescriptions filled with generics. In the United States, generics and biosimilars were about 90 percent of prescriptions but only about 12 percent of spending on medicines in 2024.
- Reimbursement rate: what payers pay for each medicine. A "reimbursement squeeze" means payers lower it faster than the pharmacy's costs fall.
- Front-of-store sales and margin, and sales per store.
- For wholesalers: gross margin (a few percent), operating margin (around 1 to 2 percent), days of stock and how fast they are paid.
- For labs: requisitions (test orders) or patients per day, revenue per requisition or per patient, tests per patient, cost per test, and turnaround time.
- For imaging: scans per machine per day and the share of opening hours a scanner is in use (utilization).
McKesson had revenue of about USD 403,400 million and gross profit of about USD 14,550 million in its year to March 2026. What was its gross margin, as a decimal? (Round to four decimals.)
How can a drug distributor stay profitable with a gross margin under 4 percent?
Why does a lab care so much about the number of tests it runs each day?
Sources for this lesson (4)
- Recognized public explanations of case-interview concepts and terms
- McKesson, fiscal 2026 fourth quarter and full year results (Form 8-K exhibit), May 2026
- Association for Accessible Medicines, "Generic and biosimilar medicines save $467 billion in 2024" (with the IQVIA Institute), September 2025
- US Federal Trade Commission, "FTC releases interim staff report on prescription drug middlemen", 9 July 2024
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