King Cat Amongst The Pharmacy Pigeons. Impact On The Value Of Pharmacy Business

There was much consternation in the pharmacy industry surrounding the ongoing Pharmacy Remuneration and Regulation Review during the early part of this year. Known as the “King Review”, named after the Chair of the Review Panel, Professor Steven King, it certainly ruffled feathers in the industry. Some of the panel’s recommendations did not find much support. As a matter of fact, Stephen King was invited to speak at the APP2018 in May. However, he was a no show. Perhaps he got wind that he wasn’t the most popular guy in town and was afraid he may be greeted with a bombardment of rotten eggs and tomatoes if he showed up. Feelings were certainly running high at the time.

My friend and mentor, Fred Raven, sadly no longer with us, was the first pharmacy business broker in Australia. I remember how extremely frustrated he would become with the inability of both buyers and sellers not having the vision to recognise and adapt to the everchanging pharmacy industry playing field. No matter what, Fred always believed pharmacy was a good investment. And, he was right. But I suspect many pharmacy owners just didn’t want to accept that change was indeed happening despite the topic being hotly debated. The advice from industry experts was uniform. There was a need for a change in thinking in relation to being too dependent on dispensary income and to begin investigating other avenues to arrest falling profits. It has been a hot topic at the APP over the years with many sessions providing information and guidance on what else to implement to make up for the loss of income in the dispensary. But, for some reason, there appeared to be a reluctance to embrace the change. Maybe we just don’t like change? We simply hope things will go back to what they were. That was over 10 years ago. Fast forward to 2018. Everchanging playing field? You bet!

I wonder what even Fred would have to say about the challenges thrown our way this year? And haven’t there been plenty! As mentioned, there was the King Review, the continuing effects of Price Disclosure, the Codeine saga, Location Rules rearing its head again (but since favourably revised for the time being), the effect on Gross Profit margins of High Value Low Margin drugs, the ongoing stoush between the AMA and The Guild to name just a few. And to top it off, the Royal Commission into banking.

2018 certainly was pharmacy’s own Annus Horribilis!

So, what has the Royal Commission into banking have to do with the value of pharmacy business? Being a constant topic across the media, you’d have to have been living under a rock not to know lenders have now tightened up across the board. The Royal Commission has highlighted the need for lenders to go back to “responsible” lending. And, pre-empting whatever directions will come from the hearing, the process has already begun. However, despite all of this, I am very happy to tell you that lenders still look at pharmacy business as a good risk and are willing to lend, albeit with a bit more scrutiny.

I recently spoke to a number of health finance specialist brokers, and the feedback is pretty much consistent. It will now take longer for an application to be processed. Whereas previously we would tell our clients to expect an answer within six weeks, we now expect at least eight weeks for an approval. And the banks will now delve more deeply into how you spend your money, wanting twelve months worth of bank statements to get a handle on your spending habits and to see what other expenses you have that were not previously accounted for in loan applications. Things like gambling, subscriptions, how much you spend on takeaways. (Seriously! Take a look at Checking On Lunch Kebabs https://goo.gl/Utnu4k )….. anything and everything that may affect your serviceability of a loan.

Pharmacy business remains a good asset. Valuation methods and capitalisation rates (also known as the  ROI – Return On Investment) seem not have have changed. The numbers are still being crunched in the same way. If you’re a pharmacy owner, just a little tip, keep in mind a different (read not as generous) capitalisation rate applies to the GP (Gross Profit) for nursing homes, viewed slightly harsher due to non-binding contracts. And, if you dispense high value low margin drugs, valuers will also want a dispense report to verify how many of these you are providing. The other thing that was quite prolific in pharmacy at one stage was the sale of products to Daigou agents for their Chinese customers (customers in China engage a Daigou agent to buy goods in Australia on their behalf). In the pharmacy industry, that has largely abated. At the time valuers were instructed by lenders to totally remove these transactions from their assessments. In hindsight, rightly so, as it really wasn’t part of the business’s Future Maintainable Earnings (FME).

Pharmacy businesses are in huge demand. GAPS (Greg Aspeling Pharmacy Sales) has a substantial database with a vast number of buyers. We constantly receive emails and telephone calls from buyers wanting the “perfect” pharmacy….. strip pharmacy, low rent, little competition etc etc. Let me tell you, they’re as rare as hen’s teeth. However, we get our share, even though they are few and far between, and when we do, we get slammed. I recently read an article in a pharmacy eNewsletter in which a broker commented how good pharmacy sales were and implied brokers receive multiple offers on every listing. Well, it does sometimes happen, but, in the real world, it never happens on every listing. It actually happens a whole lot less than what we are led to believe. In my time over the years I can count those types of listings on one hand.

At the end of the day, the market defines the price of a pharmacy. The highest price is paid by the buyer who is willing to do so. However, this is where the facilitation begins. Before even thinking of accepting a high offer and submitting it to your seller, a good broker will drill down to find out if the buyer can 1) afford it and 2) whether they are capable of completing the transaction when paying above valuation.

However, on the other side of the coin, many listings require, let’s just say, a “bit” of work. The seller has worked long and hard to build the business and, because of this hard work, expect to receive a premium. Often, price expectations are high. The buyer, on the other hand, wants the best deal they can get. Bringing the two together is a skill, with those skills sometimes stretched to the limits. Constant and intense facilitation is required to get any deal over the line. There are many parties involved in a transaction…… vendor and buyer, each one’s legal representative, accountants, landlords and the list goes on. At times I feel like a juggler keeping all those balls in the air. I guess that’s the art of facilitation. For months on end you live and breath the sale. Just not one sale, sometimes multiple sales at a time. At best we’ll get a transaction to complete in 3 months (I have personally completed a couple in 2 months. However, that’s rare). Some transactions  have taken a year. Some even longer. Talk about stress levels!  But, when you finally get to settlement day, it is such an “Oh what a feeling!” moment.

To cap it off, pharmacy business is still alive and well. When buying a pharmacy that doesn’t tick all the boxes, really read ALL of the information in our IM (Information Memorandum). We don’t put hours of long, hard work into these documents just for fun! They contain really good, relevant information. Don’t just look at the numbers, look at the opportunity as well. But be financially capable and prepared to pay that little bit more if you want to get a foot in the door. It’s very competitive. Check with your health specialist finance broker before making an offer. For the individual, buying their first, second or third pharmacy, it’s hard. Many times you’ll be competing with groups who have a vested interest in growing their brand and are prepared to pay more with favourable contract conditions and sometimes without a finance clause. One of our current listings (at time of writing) is one where someone with a bit of vision, and also a bit of hard yakka, will most likely double script numbers in a year. But too often people just can’t see the wood for the trees. Buyers, particularity first-timers, really need to think out of the square!

Starting early next year I’m publishing a regular monthly series of Case Studies of pharmacy transactions I’ve been involved in over the years. It will make interesting reading. Each sale is so very different from the next. You’ll find it very interesting, maybe even amusing. Some of the stuff is so unbelievable you have to laugh. Not that we did at the time……

To you and yours, have a wonderful Christmas and a safe and Happy New Year. Cheers.

 

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Greg Aspeling