THE IMPACT OF MARKETPLACE CHANGES ON PHARMACY VALUATIONS

The year 2006 began with some monumental and significant changes for independent pharmacy practitioners. Two major government programs/activities which had been contemplated, discussed and legislated for two years, came to the forefront as the year began.

The first of these, the kick off of Medicare Part D, was, to say the least, a difficult and confusing activity, one which created an incredible level of confusion and concern among patients, prescribers and pharmacists. Without listing all the problems and issues that have arisen — which are mentioned daily in news media throughout the country — suffice to say that the impact of this program on community pharmacy practitioners has been significant. This is true, both in terms of operational activities and profitability, when it comes to servicing those patients who are or will be enrolled in the program.

At the same time, Congress has passed the President’s omnibus budget bill, a massive piece of financial legislation affecting many segments of the population and dealing with billions and billions of dollars at all levels. One component of this legislation contains a reduction in cost of goods reimbursement for multi-source products in all Medicaid programs. Once again, without listing all the aspects of this mandate, suffice to say that it, too, will have a significant impact on community pharmacy profitability beginning in 2007.

The question that many pharmacists in the retail environment — both buyers and sellers — have been asking in recent weeks is, “How will these new and dramatic changes in reimbursement and profitability affect the value of an independent community pharmacy?”  While there is no stock answer to this question, suffice to say that if margins erode, values may erode as well. It will no doubt be some time, one-to-two years in our opinion, until the overall impact of these new programs are reflected in the financial statements of community pharmacies. However, it is already clear that principals on both sides of the buy-sell activity are concerned about the impact and what it means for the future.

We certainly would concur that if the only impact on community pharmacy owners were to be lower gross margins, there could be a negative impact on values.  That said, it is impossible at this early stage to determine the effect on sales and prescription activity. Since margin percentages are nowhere near as critical as margin dollars (since one doesn’t deposit percentages in the bank), those pharmacies with large senior patient populations may very well enjoy significant volume increases in the months and years to come. One only needs to track the changes in gross margins against annual sales and Owners’ Discretionary Profits to understand that reduced margins, while in and of themselves a negative, can be more than offset by rising sales and increased gross margin dollars.

This year, as in the past five years, more than 1,000 independent pharmacies will be sold, many to other owner operators, some to employees or family members, some to chains that will close them up. We believe that the chains will become more aggressive in their acquisition activities than they have been in past years.  Their need to build market share and prescription volume in their stores is being driven by the Medicare Part D program and the pending changes in generic reimbursements under Medicaid. Both of these activities will have a negative effect on pharmacy department gross margins and, from a chain perspective, one of the most meaningful ways to offset this loss of margin is to increase Rx volume per store.

While we certainly respect and understand the chains’ need to pursue this activity, we strongly advise independent owners who are approached by chain store acquisition managers not to overreact. As an owner, don’t jump the gun in terms of providing information or strongly considering initial offers to purchase without knowing more about your options and what the value of your pharmacy may be. Do not be overly eager to turn over prescription logs or financial records unless and until you (a) have a signed nondisclosure agreement from any prospective buyer and (b) have consulted with someone outside your pharmacy — an accountant, attorney, consultant in the industry — who is more knowledgeable than you are about independent pharmacy valuations and potential options for the sale of your business.

While this will no doubt be a complicated and often confusing year for community pharmacy practitioners, we are not seeing any slowdown in the interest of young buyers and many multi-store owners to continue to acquire community pharmacies.  Nor are we seeing any “panic selling” on the part of current owners. We firmly believe that a well-planned and well- thought-out exit strategy can be successfully implemented by the vast majority of community pharmacy owners.

This material is copywrited by Anthony P. De Nicola of Buy-sellapharmacy.com, Inc.  Publication or reprinting without the express permission of the author is forbidden.

Tony De Nicola is a pharmacist from New York who currently serves as president of Buy-Sellapharmacy.com, a national firm that evaluates and appraises pharmacies and advises pharmacists on all aspects of buying and selling a pharmacy. You can contact him and his associates at www.buy-sellapharmacy.com  

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