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How to Value: Pharmacies & Drug Stores

Industry Description

The Pharmacies and Drug Stores industry contain establishments engaged in retailing prescription or nonprescription medicines, health and beauty, toiletries and consumable goods directly to the consumer on a walk-in basis. (NAICS 446110).   Establishments may also engage in providing basic health and photo processing services.

The following are some basic characteristics of the Pharmacies and Drug Stores industry:

Industry Trends

The Pharmacy and Drug Store industry is in the mature stage of its lifecycle. In addition, the industry exhibits a moderate-to-high level of market share concentration, with the three largest operators expected to account for 68.5% of industry revenue in 2022.  Competitive advantages arise from inventory management practices, participation in pharmacy benefit management (PBM) networks and proximity/access to clients. Some of the key external factors that are influencing the industry are (i) e-commerce technology and omnichannel shifts (ii) expanded personalized offerings of health and wellness, (iii) federal and government policies and (iv) an aging population. Each of these is described in further detail below.

According to IQIVIA and National Association of Chain Drug Stores, the market share of retail prescription drug sales in 2017 was Chains (40%), Mail-order (37%), with supermarkets, mass retailer and Independent taking up the rest. Mass retailers, such as Costco, Walmart and Target, and mail-order, such as Amazon/ PillPack, are expanding their businesses to include pharmacy services, although it currently represents a small percentage of total revenue share.

For many operators, the COVID-19 pandemic triggered a re-evaluation of its omnichannel strategy. As a result, many operators increased access to e-commerce, same-day delivery, and telehealth services. These consumer-first, digital-forward omnichannel solutions offer multiple ways for patients to access services and information to manage their health.

There is intensifying competition from mass merchants, mail-order and online pharmacies. Mail-order pharmacies have grown to compose a substantial portion of the pharmacy market, increasing from 21% of retail pharmacy sales in 2007, to 37% in 2017. For example, advancement in information technology enabled Amazon/PillPack, an online pharmacy that ships patients monthly supplies of pills organized in daily planners. PillPack catalyzed the integration of e-commerce platforms into pharmacy care. Following in its footsteps, CVS Health and Walgreens created their own multidose packaging options with home delivery. 

Many large operators are adding general health services to their establishments, in hopes of making their stores closer to a one-stop shop for complete health and wellness. For example. CVS HealthHUB locations contain niche and specialized equipment, such as sleep apnea machines, and offer ancillary health services, such as screenings and expanded immunization shots. In addition, Pharmacies and Drug Stores are expanding personalized patient care and clinical services, such as behavioral counseling, adherence counseling, and chronic disease management.

Pharmacists are lobbying Congress for provider status recognition, meaning to be eligible providers of pharmacists’ patient care services and be appropriately reimbursed for providing these services. As seen in past public health emergencies, Pharmacy and Drug Stores provided point-of-care testing, delivered medications to patients, and shifted services virtually. If legislation is successfully passed, revenue and health delivery services will expand in the industry.

In addition, on the legislative front, U.S. drug pricing remains a hotly debated issue on Capitol Hill. Proponents for drug pricing bill argue lowering U.S. GDP healthcare spending, the highest in the developed nation.  Opponents warn its negative impacts on medical innovation by depriving drugmakers of incentives to develop blockbuster medicines and lower cost biosimilars and generics. Any passed legislation will impact Pharmacists and Drug Store industry revenue. Pharmacies buy drugs either directly from manufacturers or from wholesalers and are reimbursed by PBMs. Brand-name drugs account for  approximately 10% of dispensed prescriptions, but about 75% of overall prescription drug spending. Pharmacies traditionally derive a large share of revenue from generic drugs. According to USC Leonard D. Schaeffer Center for Health Policy and Economics study, gross generic margins for pharmacies average 43.7% compared to only 3.5% for brand-name drugs.

According to the Center for Disease Control and Prevention, an estimated 89.5% of individuals 65 and older use a prescription drug during a 30-day period between 2003 and 2016 (latest data available from 2019). According to the Urban Institute, the elderly population will more than double over the next 40 years, reaching 80 million in 2040. As a result of rapidly aging population with likely chronic conditions, the demand for Pharmacy and Drug Store services is expected to increase.

Key Performance Metrics

In evaluating the Pharmacies and Drug Stores, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions. In addition to evaluating financial and operational efficiency metrics, value-based care metrics measure the quality of care that’s rendered and are equally as critical.

Industry Organizations & Publications

The following organizations publish useful information:

Guideline Information: Private Purchase Transactions

Most pharmacies & drug stores are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held car dealerships is generally the best source of information to appraise a subject company.

The following are typical appraisal multiples from sale of pharmacies & drug stores:

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered. 

Guideline Information: Publicly Traded Companies

Most Pharmacy and Drug Stores are privately owned. However, there are a few that are publicly traded; meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.  

The three largest publicly traded U.S Pharmacies and Drug Stores, which include retailing medicines and health services, ranked by market capitalization are:

The Price-to-Earnings (P/E) ratios of these five companies range between 6.3 times to 15.4 times.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Pharmacies & drugstores are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.

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