Myth Busters: Change in the Location Rules and Pharmacy Values

Published Mon, November 7 2011 9:55am

Myth Busters: Change in the Location Rules and Pharmacy Values

Following the change in the Pharmacy Location Rules many pharmacists have been concerned that these changes will have a detrimental impact on the value of pharmacies. These concerns have been fuelled by industry rumours also hinting of drops in pharmacy values. However in the majority of cases, I fail to see the correlation between Pharmacy Approval Number values and the value of a pharmacy as a going concern.

As a valuation specialist we are receiving calls from pharmacists inquiring about the changes and impact on valuations. First and foremost, we believe the valuation of going concern pharmacies is not expected to change.

Pharmacies will still be valued according to commonly accepted industry standards using the Capitalisation of Future Maintainable Earnings approach. The key issue remains with all valuations, what are the expected returns for the pharmacy? Value is driven by profitability, growth and associated risks. These remain the key drivers of value (as they always have been).

Changes in the location rules, to the extent that they do not change business performance and related risks, will not change values. However, in some areas, where the new rules provide greater security (and therefore reduced risks), values may increase.

The new location rules will limit the ability for pharmacies to move into some locations for five years or more. This may increase the value of pharmacies located in some areas.

First, let's address the key issue relating to the Pharmacy Location Rule changes and how these have impacted on the value of Pharmacy Approval Numbers. It is certainly true that the change in the Pharmacy Location Rules have had a detrimental impact on the use of existing Pharmacy Approval Numbers. By abolishing long distance relocations and removing the financial barriers to acquiring a new Pharmacy Approval Number (in an approved location), the value of existing Pharmacy Approval Numbers as a stand-alone-asset have significantly diminished. Prior to the change in the location rules, we were seeing numbers transact upwards of $500,000 plus GST. At the time of writing this article, the prices have dropped to around $250,000 plus GST. However this is in reference to the sale of Pharmacy Approval Numbers as an isolated asset. When pharmacies are sold as a going concern, the businesses licences and approvals necessary to generate profit are sold as part of the business, based on the earnings of the business – not the sum of its assets.

Value for a going concern is driven by profitability, growth and associated risks. Pharmacy valuation (in order to determine the value of a pharmacy) is a product of evaluating the earnings a pharmacy produces multiplied by a yield rate – there is no reference to the value of a Pharmacy Approval Number in the determination of pharmacy value. At the end of the day, the earning capacity for a pharmacy is not inhibited by the change in value of the underlying Pharmacy Approval Number. Hence, there is no logical rationale for why pharmacy values (where the pharmacy is a going concern) should be affected. For a pharmacy with stable/growing projected earnings, there should be no impact to the value based on the changes to the Pharmacy Approval Numbers.

Circumstances in which you may need to consider the Pharmacy Location Rule changes may include sale of the Pharmacy Approval Number on its own, in a location with restricted usage of the Pharmacy Approval Number, or in locations where the changes in the Pharmacy Location Rules may allow for other pharmacies to open in the area. These circumstances are, however, a rarity rather than the norm.

As a buyer, feel confident that despite the changes in the industry, pharmacy values are remaining strong. While good opportunities are to be had, gone are the days when you could buy a pharmacy at a bargain.

For more information, visit Ask An Expert (http://experts.medici.com.au), Medici Capital's blog for pharmacy related issues.

About the Author: Frank Sirianni

Frank Sirianni is a management and finance consultant specialising in the pharmacy industry. As the Managing Director of Medici Capital, Frank has over 30 years experience and is the industry expert on Pharmacy Finance, Valuations and Business Benchmarks.

Frank holds Bachelor of Economics (Honours) and Masters of Economics degrees and consults to the owners and prospective owners of community pharmacies, banks and lending institutions, industry bodies, manufacturers and wholesalers.

Frank has published authoritative papers and reports on Valuation, Partnership, Rents, Business Benchmarks, Practice Development and Industry Outlook for Pharmacy. Frank's forward thinking, analytical skills and innovative approach has enabled the industry to grow. He brings a lateral approach to problem solving with an emphasis on economically sustainable outcomes.

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2 Comments
Mark
6 years ago

Small pharmacies with poor EBIT (i.e. were sold for slightly more than "license plus stock" value) will decline in value under the new location rules, as there old sale price bore no relation to an ROI type system.


Yes that's correct Mark. The old approach was not unusual for many professions. However, it will take some time for a new approach to setting the market price for smaller, unviable pharmacies. Unviable pharmacies with potential for improvement will still be attractive for buyers and therefore have a value.
-Frank Sirianni


Phil
6 years ago

Frank, your article "Myth Busters: Change in the Location Rules and Pharmacy Values", is excellent and I will forward to our data base of Pharmacy Clients.

We are however receiving a lot of inquiry in relation to the provider number being assessed as an asset for the purpose of finance for the business, more so for existing Pharmacies with operational credit facilities.

The point being that the financiers are requesting a significant reduction in the credit facility and/or the provision of further assets to secure same.

Are your Clients experiencing this and if so what advice would Medici provide to assist the Pharmacist in dealing with their financiers?


Thanks Phil. We are speaking to many banks on behalf of clients. Ultimately viable pharmacies will remain valuable.
-Frank Sirianni


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