Pharmacy Industry: Current Market Conditions

Currently there are a number of factors that are impacting the current market conditions of the pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies and drug stores all across the U.S.

Pharmacy Profit Ratios:
Components that are considered in deriving a realistic value include national trends such as sales figures. We know that due to the aging population and new drugs being introduced that in general most pharmacies are seeing an increase in sales. However, due to federal regulations and other market conditions, net profit ratios are typically declining although sales are increasing.

Reimbursements:
Reimbursements have been reduced and this is negatively impacting the pharmacy owner’s profit. Additional cuts in pharmacy reimbursements are expected. On top of that, some states have become slower in paying the reimbursements. With many states getting into financial difficulties themselves, pharmacy owners will need to plan for the possibility of slower cash flow or even an interruption of the reimbursement payments.

Medicare/Medicaid:
When a pharmacy business has a larger portion of a prescription sales in Medicare/Medicaid then the cuts in reimbursements, and slower payments, will have a more profound effect on the pharmacy owner’s net profits. Some owners, out of necessity, will require the use of funds from accounts receivable financing, or some other type of financing.

Taxes:
Higher, or new taxes, for personal income, business income, capital gains, consumption (VAT), and others are being considered by the government. Fewer dollars in the hands of the consumer will mean fewer purchases at their local pharmacy, while at the same time business expenses will increase. Due to higher expected taxes, pharmacy buyers will adjust their acquisition offers to meet Return on Investment requirements.

Mail Order:
Some insurance companies are designating patients on long-term medications only purchase the medications from mail order companies who provide products at lower prices. This results in local pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Mail order sales have now surpassed sales from independent retail pharmacies.

Health Care Costs:
With the rising costs of health care companies all around the U.S. have stated that health care costs have become a major concern and have either cut benefits, or proposed other ways to hold down their health care costs. These decisions will affect a pharmacy’s gross sales and net profits.

Local demographics:
The valuation process also includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results in a lower business value.

Pharmacists Shortage:
Pharmacies across the country have had difficulties in finding pharmacists.  This shortage of pharmacists not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:
There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing or capable to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and values drop. There are many factors contributing to the downward pressure of values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating values not based on realistic market conditions.

With the consolidation of the pharmacy industry that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Washburn & Associates provides valuations based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are used to derive the value of a pharmacy. As a national company that specializes in pharmacy, Washburn & Associates has extensive and current industry data. Jack Washburn, has been working in the pharmacy industry since 1972 building extensive pharmacy experience and an excellent reputation. Along with Jack’s credentials  the company possesses large amounts of national data. These are the reasons the largest financial institutions, major chains, regional chains, independents, and equity investment groups use the services of Washburn & Associates.