Market Conditions

Currently there are a number of factors that are driving the current market conditions of the pharmacy industry. These conditions affect the values of pharmacies.

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 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’s 31 years pharmacy industry experience, excellent reputation, integrity, ability, along with the company’s national data, are reasons the largest financial institutions, major chains, regional chains, and independents use the services of Washburn & Associates.

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

Reimbursements are declining.
Regulations are increasing.
Fewer young pharmacists are willing to buy, or have the financial ability.
Net profit percentages are declining.

The new Medicare Part D plans will have a negative impact on the pharmacy owner’s profit. Gross margins will decline and cash sales will be reduced. It is expected, due to the confusion of the multiple plans customers will gravitate to the larger chains, which will have a better ability to provide guidance and deal with the confusion of the plans. The rising costs of healthcare in the U.S., is a major issue. A standard benchmark of the economy has been the “The nation’s economy goes as General Motors goes.”

GM is experiencing some financial difficulties and they claim healthcare costs are a major contributor of the difficulties. GM and the United Auto Workers union recently reached a multibillion-dollar agreement to cut health care costs. Sears/K-Mart has announced cuts in its health benefits. Wal-Mart is proposing numerous ways to hold down healthcare costs. For the average company that offers benefits, 10% of their annual revenue is spent on employee healthcare, and they have seen costs jump by as much as 20% annually in some years. HMOs are increasing premiums while the benefits are diminishing. Required co-payments for brand name drugs are increasing, driving more customers to use generics, once again cutting into the pharmacy owners’ profits. Due to the concerns of healthcare costs Wall Street analysts have lowered expectations on publicly traded pharmacy stock values.

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 Rx sales, but front-end sales will also decline since the customer is not entering the store.

Local demographics also play a part in the valuation process. Communities, which are experiencing growth, bring new customers and new competition. Smaller communities have less growth potential and with the declining profits a buyer needs to purchase at a lower value because the ability to service the debt will be declining.

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 independent buyers. There are also fewer corporate buyers. Smaller chains have run into financial difficulties and have stopped their expansion. CVS purchased Eckerds. In most markets these two major buyers are now only one. It is more difficult to drive a price higher when there are fewer willing or capable to purchase.

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. Values drop. There are many factors contributing to the downward pressure of values and there is not any expectation of a turn around. Don’t be fooled by the inexperienced claiming grand outcomes and over stating values not based on realistic market conditions.