It’s about time I gave you an update on the current trends in valuations. And suffice to say, the last 6 months have been “interesting”. Without a doubt, the biggest topic of discussion I have ever had in pharmacy land. The impacts of 60DD on valuations.
Like most people, when I first learned about this policy, I had to pick myself up off the floor and take a moment to ponder, asking myself, "What should I do now regarding valuations?" Pausing to temporarily set aside existing valuations and considering the implications was essential. We needed time to figure out how to approach valuations in this new, evolving environment.
Since then, I've had the opportunity to speak on numerous occasions about the current state of valuations, particularly at the WA Pharmacy Forum in a breakout session and as part of a panel session. I've also discussed it with Westpac, Viatris, and Symbion during various roadshows across Australia. Owners are understandably concerned about how these changes will affect the value of their pharmacy businesses.
For us, the main issue was the uncertainty surrounding future FME (Future Maintainable Earnings) outcomes. In addition to our usual FME determination processes, we had to make assumptions regarding the percentage of 60DD adoption, what earnings period was genuinely "maintainable," and the potential mitigation measures owners might take. While we assume a 63% take-up rate in our FME determinations, the actual impact on individual pharmacies remains uncertain until we are fully immersed in the 60DD environment. The variations between 63%, 50%, 70% or whatever the outcome may be, are enormous when you think of FME and valuations outcome. Furthermore, owners will implement mitigation measures to survive and reduce the impact, but determining their exact effect is complicated:
1. There's often a gap between what owners say they will implement and what they actually put into practice.
2. Patient reactions to these changes are unpredictable. For example, increasing prices by $1 may not lead to a proportional increase in sales.
3. Plus, if I may be so bold to say, we perfectly understand the motivations of people we are doing valuations for. We know owners will overinflate the impact of the mitigation measures in order to achieve a favourable outcome in the valuation.
4. Some mitigation measures cannot be accurately determined. For example, introducing a new service.
The issue the industry must accept here, is the potential variation in a “determined FME” versus what the actual FME is could potentially be significant due to so many assumptions we now have to make. There can potentially be material variations in valuation outcomes.
The determination of Cap Rates has also been intriguing. The biggest determination of Cap Rates is the current state of the market, meaning what pharmacies are currently buying and selling for. The market that existed before 60DD is no longer relevant. We had to wait until there was a sufficient market of pharmacies exchanging hands post 60DD before a new base can be established. Unfortunately, that was going to take time, so once again we had to make assumptions. In WA there still has not been enough stores sold in order to understand the current market. On the East Coast the market is appears to be more active.
In addition, there may be further potential impacts from the 8CPA and Full Scope of Service initiatives, but time will tell. I have never been through a period of valuations where there has been so much uncertainty over FME. And when you then consider who are the users of these valuations, (banks for lending approvals, pharmacy owners for selling considerations, pharmacists for buying considerations, pharmacy partners for entry and exist considerations, Family Court considerations), a lot of reliance is being placed on a scenario where there is a significant potential variation of outcomes.
Given time, we will learn what the implications are on a store-by-store basis, and we can start determining FME more reliably. The pharmacy business market will reestablish and cap rates can be determined more reliably. Buyers, sellers, banks etc can then have a bit more comfort in FME and valuation outcomes. That is just the scenario we are all in.
Curious about to learn more about 60 DD and your pharmacy? We’re here to provide guidance and insights tailored to your business. Feel free to get in touch with us to discuss valuations, appraisals, or consulting related to 60 Day Dispensing. Your questions and concerns are important to us, and we're here to help you make informed decisions.