Pharmacy Finance & Valuations

Have we seen any impact yet?

A recent mortgage industry forum in Sydney concluded that "Rising borrowing costs may potentially reduce profitability for a large number of retirement village operators, thus putting downward pressure on values".

While we have not seen any such impact in pharmacy, it is probably the most frequently asked question in the market. Have PBS reforms or the financial crisis affected pharmacy values?

Retirement villages lose a third value

FALLING retirement village valuations had carved as much as 30 per cent from secondary stock since Christmas, financiers were warned.

CB Richard Retirement Housing and Healthcare division said downward price adjustments could be expected in the next round of retirement village valuations as yields and discount rates came under pressure. CBRE's annual valuation and advisory mortgage industry forum in Sydney urged financiers to proceed with caution when valuing retirement village assets.

Pharmacy impact

While pharmacy has not seen any impact on pharmacy values, the level of activity is down on previous years. Increased borrowing costs, reduced profitability, and greater scrutiny by all banks in assessing finance applications have reduced access to capital and the ability to fund pharmacy purchases.

The impact for pharmacy so far has included:

• Increases in overall cost of funds and fees
• In particular, higher margins for higher risk deals
• Tighter credit requirements and application processes
• Focus on valuations with risk assessment rather than simple appraisals
• As a consequence of a possible general economic slow down, reduced retail growth and possible flow-on effect to health expenditure

However, there is a risk that good deals will be overlooked by bankers and pharmacists alike. Many pharmacies are still performing exceptionally well.

Pharmacy buyers, and banks alike, should consider the underlying business performance, impact of PBS reforms, quality of management, local area developments, and other fundamental business drivers on each pharmacy. Greater due diligence will be required to ensure the information provided fairly reflects the business performance and highlights the outlook for the business.

Equally, all parties will need to test the business results (i.e. complete "what if" analysis) in the light likely declines in both sales growth and gross margin.

Assessing Pharmacy Performance

In the light of the outlook for further deterioration in financial performance and increased cost of finance, business assessment will be more critical than ever!

The 4 key issues for focus are:

1. historical performance and results to date
2. business sensitivity to known market changes
3. business sensitivity to finance costs and pressures
4. outlook and sustainable growth

1. Historical results

While the history is relevant, its primary use is in assessing the outlook for the business.

Having said this, it is important that the information on which you base any assessment fairly reflects the business and can be relied upon.

A concerning trend in the current market climate is the paucity of information sometimes supplied. While this may be acceptable in a rising and strong market, they are certainly not acceptable in the current market.

If you need to rely on limited information, get warranties from the seller and/or business broker.

You can do a lot of this analysis yourself, but you will find it invaluable to get some advice from an industry expert. Ask their views on:

• market conditions, changes, and trends
• factors affecting market prices and margins
• the business' outlook and health

2. Business sensitivity to known market changes

Pharmacy owners (and prospective owners) will be aware of the PBS Reforms. The Pharmacy Guild recently launched ScriptMap at the APP.

This program analyses the impact of the known PBS Reforms on each business and will prove invaluable for owners and buyers.

3. Business sensitivity to finance costs and pressures

A simple spreadsheet will enable you to test the impact of:

1. possible further increases in finance costs (interest rates and fees); and/or
2. need to reduce loan to value ratios

Both of these scenarios are likely in the current market climate and need to be tested for your pharmacy.

4. Outlook and sustainable growth

Ultimately, this is the key question!

What is the outlook for the business? The inherent value is related to the outlook. You are buying the future, not the past. Growth sites will be worthwhile buys. But a stagnant or declining site, will cost you money.

Medici Capital completes valuations throughout Australia for all banks and financial institutions with a pharmacy lending policy. Medici Capital remains the only authorised valuer for all major banks across Australia. Our advice to clients and banks is to look at the key business drivers. Now is an opportunity for rational market action. However, caution is required.

Vendors and brokers will also need to accept the need for greater disclosure and transparency.

Pharmacy remains strong, and the sector is stable.

For further news and updates relating to pharmacy finance developments visit www.medici.com.au If you would like to discuss matters raised in this article or other pharmacy issues, why not ask a question at http://experts.medici.com.au/