Pharmacists face negative equity

Gary Culliton speaks to Mr Jim Canavan, UniPhar CEO, about how pharmacies have reduced in value over the last 18 months .
Pharmacies may have reduced in value by one third over the last 18 months and young pharmacists who bought businesses within the last two years may be looking at negative equity, because of changes to the HSE’s drugs reimbursement arrangements.

Healthcare distributor Uni-Phar has encouraged pharmacists at 150 outlets to buy the premises in instalments at an average cost of €1.75 million each, through its Independent Pharmacy Ownership Scheme (IPOS) over the last few years.
“Unless you bought your pharmacy within the last two years, at a price that reflected a significant ‘hit’ on the drugs margin, you would be exposed and it looks like there will be casualties,” said UniPhar Chief Executive, Mr Jim Canavan. “People who got in at the top of the market are quite vulnerable.
“There are pharmacies which won’t be able to survive two years to trade out of this. There are pharmacies that have just been keeping their head above water: this is a serious body-blow to them.”
“Even with a thirty per cent cut in the value of retail pharmacies, it might take pharmacies a couple of years to get back to where they were,” said Mr Canavan. The IPOS scheme, established just prior to the industry’s deregulation, bills itself as a facilitator to the community pharmacy sector. UniPhar is an investor in pharmacies, through IPOS. The purchasing pharmacist starts out with 16 per cent of the equity. The rest of the equity is split between UniPhar (42 per cent) and an investment company (42 per cent) set up for other pharmacists to invest in the IPOS scheme.
h4. IPOS purchase plan
The purchasing arrangement is based on ‘buybacks’ every three years. Over the course of a 10-, 12- or 15-year contract, the pharmacist becomes the 100 per cent owner of the business. Mr Canavan claimed UniPhar’s IPOS instalment purchase plan for pharmacies can support a pharmacy that is in trouble and give it the space and time to trade out of its difficulties.
Investors have been confined to pharmacists. The oldest IPOS pharmacy was purchased in 2001. There are now 150 pharmacies in the network. Over 300 pharmacists have invested in the investment vehicle which acquires the pharmacies. They do this through four funds, which in turn own a block of pharmacies.
UniPhar’s growing influence among independent pharmacists has provided a bulwark to the multi-nationals’ growth objectives. IPOS began at a time when multiples were coming in with the firepower to buy whichever pharmacies they wanted. The pharmacist working in the outlet is paid a salary, but gradually buys the shares back. It did give younger pharmacists a step onto the ladder, which might not have been possible before.
h4. Must satisfy banks
“We want to be acquisitive, but it’s of no value to us to acquire pharmacies at top prices, if we can’t get purchasing pharmacists. We have to satisfy banks and investors,” said Mr Canavan. A typical pharmacy costs between €1.5 million and €2 million. Mostly, this reflects goodwill. Pharmacies are usually valued as a multiple of turnover.
The reduction in reimbursement has a dramatically different effect on different pharmacies: the impact will be greater on high GMS pharmacies (though these will benefit from the flat fee when it comes in). Performance, location and competitive threats all affect this valuation. The mix of business is important and thus, some pharmacies are more effective at regaining that margin than others.
“Lots of pharmacies are going to be in very serious trouble because of the reimbursement changes,” said Mr Canavan. “The IPOS network can help our pharmacies trade through the difficult times. If ever there was a need for a shared-risk ownership scheme, it’s now.
“If a pharmacy had six good years in the scheme, now they’re facing a hit equivalent to two years of income,” he added. Very few deals have been done in recent months under the IPOS pharmacy purchase scheme, as changes in the HSE’s terms of trade have hit pharmacy valuations, while vendor expectations have not changed. There is a lot of anxiety. “We have our team of senior managers and financial analysts to help these pharmacies that are facing difficult times. Even if a few pharmacies struggled, that would be more than outweighed by the unrealised value of other pharmacies in the chain,” said Mr Canavan of his €250 million IPOS investment.
h4. The HSE ‘hit’
The reduction in the reimbursement is having an effect on pharmacies and, for some, it is a very significant impact. In recent times, UniPhar has been factoring in the HSE ‘hit’. “Vendors’ expectations did not change, so it was very difficult to get deals done,” said Mr Canavan. The company has acquired few businesses in the last 18 months.
Within the IPOS contract, there would be stock loans and a normal ‘working capital’ arrangement. In almost all cases, the premises is leasehold.
Catalyst is United Drug’s model for supporting their customers. It also is a funding mechanism which allows these customers to acquire businesses in the marketplace. The scheme operates using straight loans, rather than equity participation. The security of the loans and the businesses is thus the primary concern.
Through Catalyst, which is a debt-based scheme offered at a fixed rate, United Drug’s strategy has been to ensure that the same level of support is given to a pharmacist whether he or she is buying one pharmacy or a number of pharmacies. The vast majority of customers who availed of the scheme are singly-owned individual pharmacists, with 100 per cent control and ownership of their pharmacy.