Choosing the Best Buyer for Your Specialty Pharmacy
by Andre Ulloa
Choosing the Best Buyer for Your Specialty Pharmacy
Choosing the best buyer for your specialty pharmacy is a combination of matching your objectives for the sale with what your business has to offer a potential buyer. That means weighing the options of either a strategic or a financial/platform buyer to give you the best chance of maximizing the value of the transaction. Here are a few guidelines that can help you bring potential buyers to the table.
Strategic buyers (e.g: Caremark or other large pharmacy corporations) are looking for specialty pharmacies that will increase their patient volume (ie Market Share) and purchasing power. This incremental increase to the top line brings with it higher operating margins which improves earnings. This is the concept of vertical integration. In general, strategic buyers will pay a price based on revenue in cash (no equity rollover) because they are so heavily focused on the line items higher on the P&L and will conduct a quicker close compared to a financial buyer. A strategic buyer’s focus will be on gaining market share; capturing the patients, prescribers, and marketing potential. The marketing and sales team may represent a large part of the value proposition on the deal. An enforceable Non-compete provision is vital. The buyers don’t want to give sellers a bunch of capital just to become their new competitor. It is unlikely that senior management will transition with a strategic buyer.
Financial buyers (e.g: Private Equity), by contrast, are motivated by potential returns in anticipation for an exit, or sale, of the business within approximately 5 years. There are financial buyers with “patient capital”, such as a family office, who may buy and hold. With either buyer, qualifying business’s earnings history and potential is the priority. The financial buyer approaches the purchase with a future exit strategy (such as a resale or recap)) already in mind. There is very little margin for error in the eyes of a financial buyer. They need to be able to grow the profits (EBITDA) and provide above market returns to their investors, also known as, Limited Partners. They must perform at a rate of return significantly better than market rates (eg. Index funds). Otherwise, it is not worth the risk, nor will they satisfy the expectations of investors. A financial buyer is an excellent option for operators looking to have acapital partner with industry and financial expertise. They generally expect management teams to contribute a portion of their sale proceeds into equity and maintain a position in operations. This is an equity “rollover”. This could be advantageous to sellers who want to continue growing the business yet want to take some risk and capital off the table.
If your objective is to obtain the most cash and completely exit, a strategic buyer is usually the best fit. If, however, you have other goals, such as growing operations while limiting your risk, a financial buyer is generally a better choice.
What buyers are looking for
Volume and Gross Margin
In our experience, a gross profit of about $3 million is the minimum threshold to attract a qualified private equity investor. There are search fund or independent sponsors who may do it for less, however, they are not as credible, lacking a strong track record.
It is imperative that you have a reviewed set of accrual financials (preferably prepared in accordance with GAAP) to support your top- and bottom-line figures. See the M+A “Preparing You Company for Sale”
If your specialty pharmacy is operating above the $3 million gross profit threshold (and thus attracting the attention of a financial buyer), clear records of accounts receivable (AR) and cost of goods sold (COGS) need to be available. Without these, or if the records appear questionable in some way, the normal process for a financial firm will usually be to conduct a Quality of Earnings analysis, which will almost certainly reduce your valuation.
Controlled substances have become a sensitive issue in recent years so how those are being handled is going to be carefully scrutinized.
Drugs which are potentially obsolete because they are either replaced or effectively curing the disorder could be less valuable. A rule of thumb, if the therapy is sold at high rates at a “big box” pharmacy, it will be attractive to Strategics and not particularly interesting to Financial buyers.
If the medication contract is at risk of termination or there is potential reduction in reimbursements this will de-value the pharmacy EBITDA calculation from financial buyer.
Other risk factors
Active pharmacy benefit manager (PBM) contracts and the cost of DIR fees are obvious issues that need to be tracked and presented in detail.
The pharmacy’s mail-order business; the volume of drugs being shipped “Out-of-state” and the terms and costs of shipping contracts may be removed from the valuation of a financial buyer.
A thorough analysis of your operations with the help of an expert M&A advisor will help to uncover and properly quantify these and other considerations for potential buyers. Team M+A, powered by American Healthcare Capital, has extensive experience preparing and assisting Specialty Pharmacy owners gain the highest valuation in the market.
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Andre has closed transactions in a variety of healthcare segments. He specializes in all Pharmacy types, Home Health, Private Duty, Hospice, and Physical Therapy. He graduated with a B.A. degree from the University of California, Los Angeles, and he is bilingual in English and Spanish. Along with sell-side and buy-side representation, Andre can assist clients with debt financing.
Prior to joining American Healthcare Capital, he was a Principal at Riverbrook Capital, an Investment Bank. As an agent of a registered broker-dealer, he has helped lower middle market clients with financial transactions including capital raises, debt restructurings, and sell-side and buy-side acquisition projects.