Pharmacy market update


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The robust pharmacy market of the last few years may face disruption from a number of external factors in 2019 says Natalie Sirianni

For those of you that regularly read my articles, you will know that it has been a very active and robust pharmacy market throughout Australia during the last couple of years.

There are four main reasons why the market has been strong over the last few years:

  1. Limited Supply – of pharmacies on the market
  2. Strong Demand – from buyers in general, but does vary by type and location of business
  3. Low interest rates or cost of capital – currently at historical lows
  4. Good returns vs other investment classes – while this has varied, pharmacy is still performing well

So, what does 2019 hold for the pharmacy business sales market?

While only time will tell, there are a few factors that I see that may impact on the market over the next year or so:

  • Federal Election
    Obviously the result of the Federal Election will impact on the economy and also may provide us with a new Health Minister. I’m not going to speculate on the outcome or possibilities of this other than to say, there are always pros and cons and the outcome of this could be a positive or a negative – only time will tell. As a side note, if Labour get in and do change any rules around the Negative Gearing of property, it is likely to affect point 4 above.

  • Banking Royal Commission
    It is still early days here but now that we have the final report from the Banking Royal Commission, it will be interesting to see if this has any impact on their lending to the pharmacy industry. From my reading of the recommendations (full disclosure here though, I have not read the 500+ pages of the final report in full!), there does not seem to be much comment in relation to business lending. But we will have to wait and see the impact on the banking and finance broking industry in general. It does however seem likely that interest rates are going to remain low in the foreseeable future.

  • Seventh Community Pharmacy Agreement (7CPA)
    Negotiations for the agreement are likely to commence this year. From past CPAs we know that this is likely to be fairly lengthy process. History also shows that generally the supply of pharmacies on the market decreases during this time.

These three ‘events’ can all have both positive and/or negative impacts on pharmacy and therefore on the pharmacy business sales market. They do add some element of risk as the future is unknown.

However, if we look at the four factors that we identified earlier as to why the market has been strong over the last few years and how they are likely to be impacted, in general, we are likely to see even further reduced supply and continuing low interest rates.

As I said earlier, only time will tell the impact on the pharmacy business sales market. But if you are looking to buy a pharmacy or sell your pharmacy over the next year or so, it will be critical that you consider these factors.

Natalie Sirianni

Natalie Sirianni, Medici Capital

If you would like to discuss the above or the pharmacy market in your area, feel free to call me on 1300 ATTAIN (288 246). I look forward to assisting you through the important process of buying or selling a pharmacy!

 

 

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1 Comment

  1. Kristine Hall
    13/03/2019

    No 2. Demand is the key reason pharmacy prices have remained buoyant (due to the record number of eligible registered pharmacist buyers).

    As pharmacist buyers, we are frequently distracted by the emotional aspects of buying a pharmacy – the desire for autonomy, the perceived prestige of being an owner, the need to buy in a certain location, the desire for more than a basic pharmacist wage etc.…We do not always view the purchase through the lens of a rational investor. I would be wary of paying above bank valuation in today’s market and would strongly recommend consulting an experienced pharmacy adviser when making an offer. Someone in your corner, backing your interests, with no hidden agenda.

    Have you heard of the saying, ‘It’s worth what someone is willing to pay’? How much comfort does that provide to the person who brought a house in Sydney in 2017? Or a taxi license in 2011?

    Caveat Emptor: buyer beware.

    Some issues to consider when buying a pharmacy in 2019:

    1.Return on Investment – Bruce Annabel and Mal Scrymgeour reflect on falling returns in their AJP article, ‘Smooth Sailing or a Wild Ride’ (17 Feb 2019). Of real concern was the return of 8.9% in 2018 for client members of one of the largest banner groups (lower than bank shares!).
    I also note IBIS (March 2019) forecasts annual revenue growth to fall to 2% in 2019-2023 (this will mean a lower net profit margin if expenses exceed this 2% growth).

    2. Wages – Any increase in wages will result in a fall in pharmacy value. We are presently awaiting Fair Work Australia’s decision on adjustments to pharmacist wages following further submissions for PPA’s Work Value Case. Further, PSAs 2023 vision includes expansion of pharmacist roles outside community pharmacy. This will potentially lead to wage increases to attract appropriate candidates.

    3. The Amazon threat – With Amazon’s acquisition of Pillpak in the US, entrance into the Japanese pharmacy market and expansion of operations into the Australian retail market, we cannot underestimate the ability of Amazon to disrupt the Australian pharmacy industry. Amazon is a global powerhouse with heavy investment in robotics, artificial intelligence and fulfillment. While the Australian pharmacy industry is highly protected, it is not untouchable (we need only reflect on the taxi industry).

    4. Banks – A voice of reason in a sellers-market! Banks need to protect their interests, and in doing so, will protect the buyers interest.

    There are still some good opportunities, and buyers with the right vision, strategy and energy will be poised to do well.

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