Specialty pharmacy niches are not just important for profitability in the industry: They are necessary for survival. In a way, the importance of finding your niche in specialty pharmacy can be summed up by the well-known saying of poet John Lydgate (as made famous by Abraham Lincoln): “You can please some of the people all of the time, and you can please all of the people some of the time, but you can’t please all the people all of the time.”
You can’t be everything to everyone, but you can be everything to someone. This is why you should know your niche. Carving out a niche in the specialty pharmacy market is essential to building market share and improving ROI. Once patients discover that your pharmacy offers unique products and services that they cannot find nor easily access anywhere else, they will become long-term customers.
Different niches in specialty pharmacy
In a general sense, what differentiates a specialty pharmacy from a community pharmacy is a higher level of involvement in the patient care process, and as a practical matter, accreditation from at least one of the recognized accrediting bodies for specialty pharmacies. Differentiation among specialty pharmacies, on the other hand, is primarily defined by the drugs handled by the pharmacies: the disease states they treat.
More than 45% of all drugs sold now fall under the definition of specialty drugs (in general, medications that have a high patient cost and require constant interaction with pharmacy).1 That means there is a vast array of disease and treatment niches available. The choice of which one is best for your specialty pharmacy depends on the needs of the available market and the market you are trying to reach.
Some examples of specialty pharmacy niches include:
Oncology and cancer treatment.
Chronic disease treatment, such as neurological disorders
HIV/AIDS maintenance and treatment.
Your choice of niche also depends on the patient management capabilities the pharmacy has or is willing to develop. Likewise, depending on the market and the pharmacy’s position, certain niches may lend themselves to borrowing a page from community pharmacies and supporting value-adding non-dispensing services such as chronic care management, hospice care, home care services and point-of-care testing.
Choosing the right niche for your specialty pharmacy
The main factors in determining the right niche for your specialty pharmacy are the referral sources (prescribers). Define the disease states that your specialty pharmacy is capable of treating, and then assess which of those is best for the available market. If there are a profitable number of prescribers accessible to your pharmacy, and if those doctors have numbers of patients who are in need of a more high-touch pharmacy, then you have found your targets.
Defining the disease states that your specialty pharmacy can handle is likely the most challenging part of finding your niche. Focus on disease states that are chronic, have relatively easy to define patient demographics, are not competing with Big Box (Strategic) chains, and have lower payor risk.
Consider the drugs involved and look for those high-margin products that big-box stores in your market don’t stock. This requires a bit of a balancing act. Many specialized drugs have narrow distribution networks, which is usually an advantage, but careful due diligence is in order. Contract risk – getting locked into a contract where the patient base is not large enough to make it worthwhile – is an obvious problem to avoid.
Likewise, since many patients’ choice of pharmacy is dictated by their insurance provider, you need to ascertain what competition you may be facing from PBMs for a particular treatment.
Valuation of niche pharmacies
As a rule of thumb, the enterprise value of your specialty pharmacy should be between 5 and 7 times adjusted EBITDA, A ratio of 5-7 times EBITDA is a reasonably safe valuation target, with an EBITDA of $1 million being the lower threshold to attract multiple qualified buyers. Strategic buyers will pay 12 – 18% of revenue, but as we mentioned, they won’t be attracted if you have carved a niche outside their target patients.
Ways in which you can push your pharmacy value toward the higher end range include:
Honing your pricing strategy. Provide pricing clarity. Advocate for the patient budget and pricing needs
Assisting patients with insurance authorizations. Provide a call center with knowledgeable, helpful staff
Offering alternative medications where applicable. Push for generics.
Obtaining additional accreditations. ACHC and URAC.
Obtain Limited Distribution or Manufacture Direct Drugs
Sell Data to Manufactures
Maintaining a solid compliance record. Have your Books and Records organized
QUICK TIP: Considering how tight margins are, get yourself a cash back rewards credit card(s), and make all your inventory purchases on it. You could see as much as 2% added to your gross margin.
Business outcomes in your chosen niche, however, are only as good as the competence of your team. Finding a feasible patient target and then achieving it requires a clear understanding of exactly what products you are selling and then training a team around that product. That, after all, is the essence of specialization.
It is also important, especially if you are seeking to attract financial buyers, not to exceed mail order thresholds. The volume of mail order sales and the costs of shipping contracts are often deducted from pharmacy valuations. In order to accurately account for this in assessing your pharmacy’s value, stay within your mail order limits.
Finally, it goes without saying that having a clean set of verified business records, such as accrual financials, accounts receivables records and cost of goods sold, will help support your valuation and minimize delays during the buyer’s review process.
Ask the experts
An expert Team M+A advisor can help you to unlock the full value of your specialty pharmacy. Talk to the experts at Team M+A, backed by American Healthcare Capital, who have years of experience in assisting specialty pharmacy owners maximize their business potential.
1Fein, Gill, and Long “Specialty Pharmacy Industry Outlook: What’s Next?” May 2019. PowerPoint presentation, slide 30.
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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.