Resilient profession gets its reward

I think it's generally very, very good.

That came as a shock. But as I talked about with a number of clients, really pharmacy is an incredibly resilient profession. There have been shockwaves hit over the years, and I reminisce to one in particular who can remember when photo developing was a major source of revenue in pharmacy. And when that went out the gate, there was some fears that could be the end of a great revenue stream and it was. But pharmacy has an incredible ability to pivot generic substitution,

the competition from CW and other big boxes. And the one thing I've observed over the journey is that very good pharmacy operators pivot quickly, move on. They don't look back, they look forward and look at other opportunities. And I think to that extent, the 8CPA has provided them with an incredible opportunity in the moving forward. It's injected some certainty in terms of future remuneration. It's provided some compensation for the potential loss of revenue with the 60 day dispensing.

It's provided the government an opportunity to affirm the structure of pharmacy with regards to location rules. But fundamentally, what I think it has done is provided community pharmacy with a clear direction in the going forward. And that is profits can be made out of services, not necessarily just product. And ultimately pharmacists are health professionals. They're not necessarily supermarket operators.

And for those that operate community-based pharmacies, this provides an outstanding opportunity to enhance the professional service offering and also to grow it and provide other revenue sources that don't involve stockholding, that don't involve a cost of goods sold. And basically the provision of services is a clear direction for a lot of these businesses. Going forward.

There's a certain inevitability that the takeup of 60 day dispensing over a period of years will escalate dramatically and could five, six years down the track represent a hundred percent of the modus operandi. What we've encouraged our clients to do is to accept that there's a certain inevitability about 60 day dispensing and a certain inevitability about a loss of revenue and that they have no control over. On the other side of running a business, you have control over two other elements.

You have control over your cost of goods sold and you have control over your below the line expenses. And certainly a number of our clients have focused on their margin looking at either buying better or alternatively looking at their pricing model. Are they too cheap? Are they competitive? Does increasing your price to reflect the service offered? Is that going to impinge upon the growth of your business?

And in a number of cases, people have been to review their pricing effectively and increase their margin, thus providing further revenue to help offset the 60 day loss of revenue. Secondly, we then looked at below the line expenses, looked at hours of opening, looked at their roster, how do you ensure greater productivity from perhaps fewer staff? And in a large number of cases, that's provided great dividends to the pharmacy business operator.

And Covid was an interesting period for pharmacy because whilst it was tremendously taxing from a personal point of view and extremely stressful, it was financially a particularly lucrative period for pharmacists. And given the fatigue that followed on from covid, what we were finding is that our good operators,

perhaps it dropped the ball a little bit with regards to their expenses. I mean, they were tired, they were fatigued, they'd had enough, and the 60 day dispensing really refocused them on proper business operation because fundamentally, at the end of the day, if you're going to lose revenue from a source and you're trying to recapture that revenue, you can't do it out of the 60 day dispensing. I mean, that's gone,

that's inevitable. But if you look at your pricing and your margin, and if you look at your expense levels, there can be a high degree of offset, not a hundred percent offset, but certainly go a long way towards that. So for a number of operators, the loss of revenue at this point in time and it will get bigger out of the 60 day dispensing has been offset by better operational methods, pricing and expenses.

So the 8CPA for those particular operators in the short to medium term has provided them with a huge increase in revenue and more importantly, a sustainable increase in revenue. The certainty that's been injected as a result of the 8CPA is quite extraordinary. When your remuneration is pegged to CPI, it's not dissimilar to owning a commercial property or owning the building that they're in.

If you pay a hundred thousand dollars a year rent and you are guaranteed that that income from rental is going to grow, its CPI every year, you're pretty happy. And that's what's happened to pharmacists. We've had received some compensation with regards to the impact of the 60 day dispensing, but more importantly, and I think it's from memory,

78 cents per claimable script. I mean, I was doing an exercise with a client last week, and if you are doing 60,000 scripts a year, 50 to 60,000 scripts a year would be a medium sized pharmacy and 80% of those are claimable. Well, you're looking at a $35,000 injection straight to your bottom line,

straight to your bottom line. So if you've really put the blow torch on your business from an expense point of view and a margin point of view to help defray the impact of the 60 day dispensing, these new measures are just cream on the cake. And not only does it add to revenue, a lot of pharmacists often overlooked the fact that there's a double-edged sword here. Not only is their revenue on a weekly, monthly, annual basis enhanced, but so is the value of their business.

If you put $30,000 straight to your bottom line and that's a sustainable revenue that will be reflected at an average cap rate of 16%, well we're looking at a $200,000 plus increase in the value of your business. So the guild has to be commended for not only protecting revenue but enhancing value.

If there's uncertainty about the future of the maintainable earnings, valuers are going to go back down the rabbit hole quite rightly. Why would they take the risk about guessing what's going to happen? And banks follow suit. So if you have valuers and banks, conservative lending can be more difficult. And if we don't have aggressive lending in the pharmacy space, we don't have a really good robust market.

What the 8CPA has done is inject certainty to future maintainable earnings, but it's also given your smaller community pharmacists an opportunity to create a meaningful difference between their larger and major competitors. I think the dichotomy in business operations that's created through the 8CPA whereby a pharmacist can engage predominantly in a dispensing and pharmacy services business and still have a very profitable business going forward is a significant change.

It's impossible to compete with the big boxes for front of shop trade. This provides really far reaching forward looking pharmacists an opportunity to have a slightly different model, minimal front of shop maximization of services, maximization of health services and advice over the dispensary. Now, how that all plays out and how many go down that very distinct path we're wait and see.

But the feedback I'm getting from some very experienced operators is that this provides boundless opportunities to reframe their business. And the general acceptance has been very, very good. And I think the other thing too, that they've done separation in the administrative function. I mean, we've got the PSA now controlling pharmacy behavior, the 8CPA controlling remuneration. We've got a separate wholesalers agreement.

Rather than everything being jumbled into one, the expertise of various parties is being directed to what they do best. Which again leads me to suggest in an overall context that government is rewarding pharmacists, I think for covid, which they're entitled to. I mean, let's not forget, there are only two places you could go shopping during covid, the supermarket or the pharmacist. And I think up until this, that hadn't been the appropriate recognition for the role that pharmacy played

during the pandemic. Certainly from a business point of view, it was good, but the toll that it took on a lot of people was quite significant. And that goes for the pharmacist support staff as well. Not only did the pharmacist have to battle through the difficulties of covid, but they were there to mentor council, pharmacy assistance,

shop assistance, that sort of thing. So this is a recognition in my mind of the importance of pharmacists logistically to government and one would hope it's some form of reward for what they went through.

I go in and I run the business and then I attempt to explain them. Well, if doing the same thing over and over and over and again and expecting a different outcome is the age old definition of stupidity. So when you get an opportunity, have a plan to take the business forward because if you maintain the status quo, all that will happen is you'll have a downward spiral.

The HCPA enables any purchaser of a community pharmacy to look at the offerings of that business and inject new professional service offerings that are well remunerated now that will have its challenges, as you indicated, with costings, labor force, et cetera.

And yeah, we've got to grapple with that. But having said that, very good operators will look at that very closely and perhaps look at how they can increase the productivity from their current or a marginally increased workforce to satisfy the need for the services 8CPA and these negotiations, including the new ones with the strategic agreement with the PSA, has been described as an ongoing journey. I guess I would ask if there was additional work that could be done to give

pharmacists confidence in buying and selling still? Well, pharmacists, like all business people want a higher degree of revenue and lower expenses. So they'd always look for change. They look to enhance their revenue. Look, there will be devil in the detail in the agreement, and there will be things there that become highlighted as a more deep diving interrogation of the agreement takes place.

But I think on what we have available to us at the moment, I would see in concert with a prospective drop in interest rates over the next 12 months that the pharmacy market in terms of value will be very much enhanced. The CPI, the CPI, indexation of the remuneration base, the very definite support that governments provided to

remuneration in the professional services space. I mean, I look at rs, I'm just trying to find the appropriate page, but there was a significant increase in remuneration for HMRs, which was quite significant vaccinations, let's be honest, we've got a GP crisis at the moment. Not only is there a shortage of GPs we've got older gps who aren't willing to work as hard.

They've got their own remuneration battles with government the obvious way forward for government, which has been touched on with the ability to dispense for items such as the pill and UTIs is an enhancement over time of the ability to prescribe. And government is pushing that way. I mean, if you look at the big model in the overall health space, the diversion away from GP function,

moving that over to other health professionals. And again, what I'm sensing, and I may be wrong, but what I'm sensing is that the fight that's always existed between gps and pharmacists over a turf war of what pharmacists can and should do and what doctors think they can and should do that might well be dissipating because there isn't a GP that I've heard of

that's got any spare space in their appointment calendar. So at the end of the day, they're not losing any business, they're not losing any revenue. But the movement towards pharmacists being able to supplement doctors' activities professionally means that the community is a winner because we're getting some healthcare.

And I can see that as a trend moving forward. The ability to man all the GP clinics and to provide GP services for an ever expanding population is becoming, from a numbers point of view, extraordinarily difficult. And certainly we've got nursing care available, but pharmacists are out there, they've got a presence in the community, they're trusted. So I see the opportunities in that direction as just increasing over the next few years.

you're borrowing at 3%. As the rates have risen, the economic and financial viability of businesses becomes more questionable and deserves higher interrogation. The 8CPA certainly took the wind out of the sails of buyer activity.

As I said before, given the uncertainty of future income and it combined with rising interest rates, we're now in a situation and the feedback is very positive that we've got certainty of future income, the prospect of lower interest rates and a more positive attitude in the banking community. Now, those three things in my mind are going to lead to a high degree of

activity. We've also got, and what we see are starting to see a lot of is very good capable young pharmacists who've had five, six years of experience growing the system, managing a pharmacy who realize disappointingly that there's a cap on your ability to earn an income as a salaried pharmacist. It's quite a bizarre profession from that point of view because once you've been a manager, you're 26, 27, your upward mobility on your income is very, very low.

And you could be at or around that income level for a long period of a working life. There's a group in there that aren't satisfied with that and they're looking to move into the pharmacy space. We've always got the larger groups looking to acquire. And I would think that some of the financial analysts for the larger groups have got the pencil out and they sharpened it and looking at the financial implications of the 8CPA to

establish what this means for them. And certainly if there are, and most of these big groups know exactly what they're doing, they can see the perspective increase in revenue, so their appetite for acquisition will, I think get higher and higher. So I can see over the next sort of 12 months to two years some very robust, robust activity in the purchasing and selling space.

And I would think that prices may well rise, cap rates could come down to half to 1%, which again, will enhance the value quite significantly.

Yeah, we've seen particularly recently a good responsiveness from banks, but there's no doubt that the 8CPA in concert with the valuers conservatism associated with it probably just pulled things up a little bit and quite rightly, because as I touched on before, the fundamentals of a business value are in the future maintainable earnings if

they were questionable. To any extent, that's going to reflect in the valuation once this is legislated and the detail, the real deep diving details extracted, and in fact talking to a valuer on Friday, they can see that the cap rates are going to come off half a percent, which is quite a significant amount in terms of what they're valuing at. And the bank's lending criteria, their policy hasn't changed at all. But still buying a pharmacy has its own challenges.

Whilst you've got more certainty on the revenue with the interest rates where they are at the moment, there's not a lot of room for mistakes. I mean, an average pharmacy will have probably a 10 to 12% return on turnover. So if you're turning over $3 million, you would expect to have after a proprietor's wage, a net income of between 303 60 on average.

Well, if the pharmacist has borrowed the whole amount, which they don't, but the whole amount and interest rates are 7%, $210,000 of that $300,000 net profit is going to the bank in interest. So we've got 90,000 in the pocket plus his wage on a $3 million business. Now you don't want to mess your expenses up, you don't want to mess up your gross profit margin because you don't have the room to move. Whereas two years ago when rates were at 3%, that same operator had 90,000 of interest

out of his 300,000. So there was a lot more fat in the system. So at the moment, we're still in this period of not a lot of fat and interest rates, I think as much as anything will be the determinant of seriously enhanced values.

You need to have those that don't have a plan to increase revenue and to secure the goodwill that they've purchased. Having a plan. And let's be honest, five, 10 years ago, the new opportunities when you bought a pharmacy to enhance its value, were somewhat limited. Now, there are very distinct options that people have available to look at extra revenue streams, compounding pharmacy services, opioid dispensing, doing the course to issue prescriptions, just to name a few.

The other ones that are likely to fail. And it doesn't matter what happens if they're too highly geared. I mean, if you, and this is the trap a number of people fell into in our low interest rate environment. Money was easy and money was cheap, but cost of funds can change dramatically. And you need to be aware of that, and you need to be aware that there can be shocks hit the industry, there can be shocks, hit the community, there can be shocks,

hit retail in generally. I mean, one of the things we've noticed with our clients that have fairly serious front of shop offerings is that consumer sentiment is very, very low and they've noticed a discernible drop in their front of shop dispensary trade. So there needs to be always some protection, some buffer in there. The good operators, and this is a lot to do with experience, they're forward thinking. They grab opportunities and they implement the opportunities.

They work to reduce their debt in the context of the cash flow of the business so that when shocks to the industry hit, they're not overly caught. I often say that if you're a very successful pharmacy owner, you would be successful in any business because you are fundamentally a good business person. And pharmacy just happens to be the business that you are applying at the moment. So I'm fortunate enough to have as clients, some outstanding operators who are just ahead of the

game. They look at their rosters, they look at their hours of opening, they look at their buying, they look at their margins, they're all over their pricing, they're all over the productivity of their staff. They're all over all forms of expenses. How can I drive expenses down within the confines of a good business operation? So the ones that fail can be a lack of experience as well. The ones that succeed,

most of it's innate. They are good operators anyway, but they do grab opportunities when they see them. And I suppose the 60 days is a good rule. They don't become engulfed in the current crisis that affects the business. They get grumpy, they get angry, and then they move on, alright, what do we do about it? Whereas the ones that fail, get grumpy, get angry and sit back and to some extent say, why me? It's just a difference in mindset to a large extent.

The first bit of advice I'd give to any prospective purchaser is talk to your bank. There are health specialists in the major banks that focus on pharmacy. If anybody wants to contact me, I'm happy to provide an introduction to those parties. These people in the major banks know pharmacy backwards. They deal with it all the time. And most importantly, they will provide you with some guidance in terms of what you can afford,

which will be based on what they lend you. Because if you dunno what you can afford, you're going to waste everybody's time. Once you've identified what you can afford, you then start the search. And that's really a function of ringing brokers. Find out what's for sale. You've by this stage identified what you could afford, what area you'd like to be in, what style of pharmacy that you would preferably like to acquire. Armed with that ammunition you drive the brokers nuts.

You ring weekly, have you got anything? Is anything coming up? Now understand the psychology and understanding the psychology of pharmacy brokers. They only get paid once. So they want to sell a business to a qualified individual that can complete the transaction. So if they get a phone call from a well-intentioned person looking to buy a pharmacy who has no idea where they want to buy, who has no idea how much they can afford, after a fairly brief conversation,

they go to the bottom of the poll. On the other hand, the person who's done his work, identified all of the relevant aspects that I've touched on. The broker will get a bit interested. And by maintaining contact, you'll always be first of thought in the broker's mind. So if something does come up, they will contact you. They all say they've got a list of buyers, but once they get past the first three or four, in my experience, they don't go to the 20th person on the list.

So credentialize yourself, be well qualified and talk to brokers. You should also engage a professional on the business side, experienced in pharmacy. I mean, quite obviously that's what I do. But there are a number of players in the marketplace, all very experienced and all very well credentialed to help young people out because you need expert eyes to go over any opportunities that's presented.

A good experienced advisor will quickly pick up if there's any issues there, what the problems are, whether the lease is an issue, a whole myriad of things before the individual decides on making an offer. And the experienced advisor will also give you an idea of whether the asking price is a realistic value

for the business. And let's be cynical, most assets like houses, businesses that are put on the market, the seller puts on a price that he hopes to get, which may or may not be reflective of the true value, but generally is a little bit higher than what we see as the true value.

As I've often said over the years to clients, the best deal in business is when both parties walk away slightly unhappy, not when both parties walk away happy but unhappy wherein the purchaser thinks he paid a little bit more than he should have, and the buyer thinks he got a bit, little bit less than he should have. If that's the outcome, I think we've achieved a good deal. Now, obviously once they get to that stage of making offers or what have you,

there's a whole raft of compliance aspects. And again, the key to his engage a professional advisor on the tax and accounting side and to engage a professional advisor on the legal side, both of your advisors should be well versed in the pharmacy space. There's enough uniqueness about pharmacy to suggest that it is a specialization. It's not the same rules and regulations for a restaurant, a hotel or a service station.

So dealing with parties that are experienced in the space will take you a long way.

The guild we're on the nose with their members for about 18 months and they've certainly redeemed themselves with this, and I think they'd be congratulated mainly because of the certainty it provides. I really feel that pharmacy was screaming for certainty. There's so much going on with the CW float on the exchange. There was another article in the fin review this morning about, it's the end of location and ownership rules. Quite a detailed opinion piece.

I think the writer might be sponsored by cw. And I find some of those things I find really galling because he used an example of how great the CW purchase of a pharmacy in the Hunter Valley was. They paid 4.4 million for it, and when they bought it, it was had a margin of 33% or 34%. And since they've got it, they've taken that to 8.5 million a turnover, and the margins dropped to 28%. And I look at that and I say, well, what's the great outcome about that?

Firstly, 65% of the increased turnover would be front of shop. They've dropped their margin. The only reason they drop their, sorry, they dropped their margin to maintain their competitiveness, but by dropping margin, they've had to get rid of a heap of staff because the matrix doesn't work the 10%. If you've got a 28% GP and 14% goes in wages, 5% goes in rent, and 4% goes from other expenses. They're making five or 6% on turnover. Well, it doesn't work, so they cut wages. So.

There's no sending of accounts waiting for people to pay and chasing up. They pay every Friday. And as a result of the 8CPA, they pay extra every Friday. And your remuneration going forward is guaranteed to increase annually by CPI. It's a fantastic model. I'm sure a lot of other businesses in the community would love to work within those parameters.