Valuation trends in pharmacy land continue to change and evolve with the times, particularly in the weird world we live in now. There have been a number of issues we have had to contend with over the past few years which have made valuations challenging. Even though we “dare” to consider life after Covid, there are still significant issues we need to address in current valuation reports.
In previous years there have been significant challenges raised, relating to cashflow boost, Jobkeeper, rent abatements, very abnormal trading months and even individual store issues such as heavily reduced turnover and excessive turnover in some cases.
Despite the issues being raised, the principals of valuation methodology remain the same and must be consistently applied. Now being in the first half of the 2022 calendar year, we face a new phase of pharmacy trading life, and with that brings a different set of issues that we must tackle. I have identified below some of these key issues below.
Covid Vaccinations and RAT’s
The foundation principle of the valuation methodology is the phrase “Future Maintainable Earnings”. That is, we need to determine the earnings the pharmacy is likely to maintain in the future. Of course, the only accurate data we have that we can rely on are historical financial statements. Most of the Covid vaccinations occurred during the 2022 financial year. Which depending on the pharmacy, represented significant activity within the store. This required additional resourcing in regard to pharmacist labour hours and produced varying degrees of income streams. Similarly, in recent months, Rapid Antigen Test’s have been sold through pharmacies as well.
The question we must apply here is, “is this income stream maintainable in the future?”. I would argue no, it’s not. At least not to the same extent. The vast majority of the income streams that pharmacies have earnt this year from these sources are not likely to continue. That is not to say they will all disappear as that is not likely to be the case. But the activity levels are likely to subdue heavily from what pharmacies have experienced over recent months. Of course, this is assuming all things being equal, and hey…. nothing has been equal for over 2 years now. In summary though, an element of these income streams would need to be deducted from the Future Maintainable Earnings calculations.
Pharmacist Wages Rates
Of course, the term Future Maintainable Earnings, also requires us to look into the expenses of the pharmacy. An issue that has been very relevant is the current chronic shortage of pharmacists. It is a big problem that we are seeing in all our clients. Owners and their teams are exhausted. They are working huge hours, under a lot of pressure and have been sustaining this for a long period of time.
Now we all know the rules of supply and demand. Very low supply, high demand, together with relatively tough working conditions results in the inevitable rise in pharmacy wage rates. Now this is not to say they aren’t worth it. Because they are worth it. Its just the model doesn’t allow the pharmacies to afford it. But afford it or not, the wage rates are going up.
Which makes for a very interesting scenario for pharmacies. Looking at the wage costs in the 2020 and 2021 financial years, given a set roster, the wages now are a lot higher than they were back then. These wage cost structures need to be reflected in determining Future Maintainable Earnings.
That also leads into the next point. What are the wage costs likely to be going forward? Who knows?
Owner’s Hours
With a shortage of pharmacists, owners are now working huge hours. I know some are sustaining 70+ hours per week and getting, or to be more correct, are tired and cranky. I know many pharmacies who can’t continue to offer Covid vaccination clinic’s as they similar do not have the resources. Valuations are always undertaken on a fully staffed basis. Meaning, wages needs to be incorporated for all hours the owner is working in the store, at a market hourly rate. So, the increased hours many owners are working need to be converted to a salary in determined FME.
Inflation, Interest Rates, Fuel Costs etc
There are many aspects to determining the capitalisation rates, but it is important to look at a cap rate as a measure of risk. In simple terms, the higher the risk, the higher the cap rate and the lower the valuation. The less risk, the lower the cap rates and the higher the valuation. So, we must ensure we look at each valuation on a case by case basis and take into account the issues the pharmacy is likely to face.
Most pharmacy data I have seen over the course of 2021 financial year and heading into 2022 year to date is showing good consistent growth in overall turnover, which is really pleasing to see. But looking forward we have some uncertainty. Nothing new in pharmacy land that is for sure. There is inflationary pressure, notably the price of fuel, food and basic cost of living. There has been chatter about interest rates expected to go up as well. They can’t stay this low forever. The issue pharmacy owners, and valuers must contend with is how will this impact earnings going forward. We shouldn’t just assume the current growth will continue, but each pharmacy is different and must be treated so. It is hard to quantify but the uncertainty of these issues is there.
Supply and Demand for Pharmacies
Cap rates in pharmacy land are largely driven by the simple laws of supply and demand. Currently there is low supply of pharmacies for sale and demand is huge. This is having an immediate impact on sales values as there are pharmacies changing hands for prices consistently over valuation. As you would expect, cap rates used in valuations are falling as well.
It is certainly an interesting time in pharmacy land with many, many issues for owners to contend with. The main one at present is surviving consistent 70 plus hours per week and not falling apart.
If you are wanting to discuss your pharmacy’s position, please book an appointment with me below. I would love to chat further and help you out.