How has COVID affected pharmacy valuations? John Thornett gives his three key learnings to date from 2021 valuations
You see there is this thing called COVID. You may have heard about it (I say this with most of Australia currently in lockdown.)
In the world of valuations, it provided just another challenge amongst a whole raft of issues we need to consider. In simple terms from a valuation perspective when considering Future Maintainable Earnings, EBITDA becomes EBITDAC, earnings before Covid.
March through to June 2020, resulted in approximately 4 months of abnormal which we needed to contend with. March as you are all aware was generally abnormally high. It was a month that was not likely to ever be repeated. It resulted in extraordinarily high sales and gross profits that at times rivalled a Christmas trade. We needed to be careful those abnormally high profits didn’t artificially inflate a valuation.
However, April and May were the opposite. Depending on the location of the pharmacy, the declines in these months were heavy. Again, we needed to be careful these abnormally low months didn’t artificially deflate a valuation. Particularly if those declines were heavier than normal trading trends.
However, generally, the huge positives from March were offset by the declines in April and May. Meaning, for most pharmacies, there was not a material difference between July to Feb trends and the July to June trends. There were a few where earnings had to be factored down. Meaning there was an abnormally high March, but April and May were consistent with the same trends in previous years. There were somewhere earnings had to be factored upwards. Overall, most didn’t need any adjusting at all.
Post-Covid Pharmacy World
What was very interesting though was the overall trends in pharmacy post-Covid. Most pharmacies were showing good growth in both dispensary and retail. This was the first time in a while that I have seen retail going upward as a general industry-wide trend. These upward positive trends were also relatively consistent from July through to recent months. This was very pleasing to see.
2. The Big Box Discounters
There was a period many years ago where the entry of a big-box discounter in a local area would cause significant declines in sales and profitability for competing pharmacies. However, this does not appear to be the case anymore. It appears some pharmacies are benefitting from this. Not only for new entrants but also from existing longer-term competitors.
Now the reasons for this is not immediately apparent. Maybe that was just the pharmacies that I came across this year, i.e. a statistically small, non-representative sample size. Maybe the industry is learning to compete better. i.e. out-service the customers, don’t compete on the same terms, quick script turn-around times, don’t be significantly different in pricing. Furthermore, maybe the public is understanding more the difference between a big-box discount retail offering, versus the value of a community pharmacy advice and service. Either way, the trends were certainly noteworthy. There are a couple of stores I have done valuations for in immediate competing territories who have performed so extraordinarily well they have made it into the exclusive club of “John’s Favorites”. What is that I hear you ask? These are the top 6 pharmacies I know of that perform so extraordinarily well year after year from the brilliant leadership of the owner/owners. I hope to do a webinar on this topic so you can see what the average KPI’s of these stores are.
3. Cap Rates
We can all sit here with the benefit of hindsight and reflect on those crazy Covid months, but what was particularly interesting was the impact on cap rates. Particularly during March to June, when there was a great deal of uncertainty there was a slight increase in cap rates during that time. Mostly because there were a lot of issues, a lot of questions and uncertainty over what the future will hold, including what the 7th CPA was going to deliver. Once 1 July ticked over, cap rates returned to normal and the demand for pharmacy businesses grew quite strongly.
It most certainly has been an interesting phase in pharmacy valuations. But it is good to see overall community pharmacy improving and being such a key member of community health. If it has been a while since you last had a valuation or appraisal on your pharmacy, give me a call and we will show you how your pharmacy is performing.
John Thornett is Director of Peak Strategies, pharmacy business consultants