Pharmacy business valuations in Australia
In this article, we investigate the driving factors behind a business valuation for pharmacies in Perth, Sydney, Melbourne, and Brisbane.
The Australian pharmacy industry has a number of positive and negative external drivers that will affect it going forward as the government strives to maintain regulation where it benefits the community, though also to reduce red tape where it negates competition.
The industry has an overall revenue in the order of 15.3 billion dollars from 3,925 businesses which operate a total of 5,500 pharmacy outlets. It is made up of independents, banner groups associated with wholesalers, friendly societies, buying groups and discount pharmacies. The main players are:
- My Chemist Retail Group 19%
- Sigma Pharmaceutical Ltd (Amcal, Guardian etc) 19%
- Australian Pharmaceuticals Industries Ltd (Soul Pattinson etc) 10%
- TWC Group Investments Ltd 7.4%
- EBOS Group Ltd 7.3%
The main wholesale group players dominate the industry, in many cases providing finance to the retail pharmacist on the basis that the pharmacist will sell their products.
Government policy and regulation
At the current time, government regulation still dictates that in most cases pharmacies must be owned by a qualified pharmacist. Entrepreneurial pharmacists have however been able to use legal and business entity structures as a way to loosening this restriction. The government regulation at the current time also restricts the location of pharmacies.
The Federal Government Harper Review completed in March 2015 looks at recommendations to improve Australia’s competition policy and reduce regulation with the community interest in mind. This review had specific recommendations in relation to pharmacies stating that the current pharmacy ownership and location rules should be removed. It remains to be seen how and when this may be implemented, but is considered to be a signal of government intentions going forward.
The Federal Government’s Pharmaceutical Benefits Scheme (PBS) recently introduced price disclosure rules that aim to cut the cost of PBS medicines and therefore profits to pharmacists. Having said this, the overall PBS funding has risen over the 2014/15 year leading to more revenue but at lower profit margins.
More recently in May 2015, the “Sixth Community Pharmacy Agreement” has been finalised following consultations between the Federal Government and The Pharmacy Guild. This agreement is to take affect from 1 July 2015, contingent on the passage of legislation to implement the government’s wider PBS package. Effectively this agreement provides some more certainty to pharmacists by extending existing location rules until 2020, pending an independent review. It also provides some relief to the PBS price disclosure affecting profit margins, with the introduction of an administration/ handling/ infrastructure fee, as well as CPI indexation to be included in the calculations.
Key economic drivers and performance
The key economic drivers are:
- Federal funding and policy over the PBS.
- Increased competition from supermarkets, department stores, online retailers and Chemist Warehouse type shops, particularly in the non-prescription medicines and cosmetic products.
- Ageing population.
- New customer services/holistic health solutions.
- Potential reduction in barriers to entry
Industry revenue peaked in 2012/13 and has fallen since such that the average annual contraction over the past five years has been 1.4% per annum. Going forward it is however budgeted that revenue will grow at 1.1% over the next five years benefitting from the ageing population and expansions of services into more holistic health solutions such as provision of drug information, clinical interventions (inoculation injections etc) and preventative care for chronic conditions.
At this time the high barriers to entry for the pharmacy industry remain in the medium term, secured by the most recent pharmacy agreement, though it is anticipated for these to dilute in the longer term as the government looks at implementing the recommendations of the Harper Review.
The major costs in running pharmacies are staff wages, costs of goods sold and rent. The typical breakdown of revenue is as follows:
- Gross profit margin 55% to 70%
- Expenses 25% to 30%
- Net Profit 4% to 8%
The profitability of many pharmacies has been reduced over recent years as government policies, chemist warehouse type and online stores provide an environment of increasing competitiveness in the industry.
Prices for smaller pharmacies, with profits to the owner in the order of $100,000 to $200,000, sell at ROI percentages of 25% to 30%.
Larger pharmacies sold on an under management calculated profit, sell with ROI’s in the order of 16% to 25%.
It should be noted that wholesaling companies that control brand names, calculate their profits and ROI’s with varying matrices (i.e. owner profits, under-management profits and standard allowances for owner’s wages) which in turn affects the quoted ROI percentages.