Iowa Pharmacy Industry: Current Market Conditions

By Brad MacLiver
Authorship and profile at Google


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

Local demographics:

Besides the business data, 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 some population due to economic conditions, or communities with a high rate of unemployment. Fewer people and fewer customers with the ability to purchase results in fewer sales and less chance of any substantial improvement in the near term. The result of this is a lower pharmacy business value.

Iowa Pharmacists Shortage:

Iowa pharmacies and pharmacies across the country have had difficulties in finding pharmacists and this shortage of pharmacists not only affects employee opportunities it also affects the amount 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 Iowa 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 IA 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 pharmacy business values drop. There are many factors contributing to the downward pressure of pharmacy 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 pharmacy business values not based on realistic market conditions.

With the consolidation of the pharmacy industry in Iowa 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.

Mail Order Drug Stores:

Some insurance companies are designating a noticeable amount of pharmacy patients as “long-term medications” and require they only purchase the medications from mail order pharmacy companies who provide products at lower prices. This results in local Iowa pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail pharmacies.

Choose a firm that can provide either a retail or specialty pharmacy business 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 an IA pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data.  Choose pharmacy specialists who have been working in the pharmacy industry long enough to have extensive pharmacy experience and an excellent reputation.  A company with good credentials possesses large amounts of national data.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and Iowa pharmacy equity investment groups use the services of companies fitting this description.

************************

Using Multiples in Iowa Pharmacy Business Valuations

By Brad MacLiver
Authorship and profile at Google


People who have purchased a residence are familiar with real estate appraisals. With an IA pharmacy business there are times when both the real estate and the business itself needs to be appraised. The pharmacy business appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.

Iowa Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Pharmacy Business Valuations in Iowa place a reasonable market value on the drug store after consideration has been given to factors such as, but not limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are a number of accepted methods for valuing a retail drug store business. Each method has its own perspective and the business owner should have a reasonable understanding of the method being used.

One simple method is to use “multipliers” This is when someone takes the net profit, gross sales, or some other figure from the financial statements and then multiplies that number by 3, 5, 8 times (whatever the case may be). However, when using simple methods such as multipliers you need to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. The stated profits are typically not the actual cash flow of the company.

3. Due to tax reasons, the company's assets will probably have a different value than what is on the books.

Taking the points above into account, it is clear that a simple Iowa pharmacy valuation using multipliers may not reflect the true market value of the drug store.  So, when financing is a necessity, simple multiplier methods are not acceptable. Banks and finance companies require third party, unbiased pharmacy valuations that are completed using advanced calculations, industry knowledge, and sound financial reasoning.

Companies that specializes in specific industries are able to provide more precise and credible valuations.  Specialists should have more industry data than a company that does not normally value businesses in that industry.  The end result of not consulting a professional who has the proper industry data will be a more ambiguous valuation.

Due to the nation's aging population, pharmacy sales are on the rise as the older generations are purchasing more prescriptions.  At the same time, however, government and insurance reimbursements have been drastically cut.  This has caused a major decline in the nets profits for the pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not a pharmacy specialist in Iowa and used a gross sales multiplier would be way off in their calculation compared to other IA pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the pharmacy business owner, or pharmacy buyer was seeking.

************************