While businesses across America seek new ways to respond to the ongoing coronavirus pandemic, one thing that hasn't changed is how we assess independent pharmacy valuation during COVID-19.

If you’re entertaining an exit strategy and thinking about how to sell your pharmacy, the outcome will largely be shaped by your store's historical financial performance. Likewise, if you're considering buying a pharmacy during COVID-19, most of your attention should be on the target store's profit-and-loss (P&L) statements, balance sheets, prescription reports and cash flow over the long haul.

There's no denying that the March-June 2020 timeframe hit pharmacies hard, particularly those reliant on selling acute medications. However, things are now trending back toward pre-pandemic levels, driven by everyday patients returning to their physicians and hospitals resuming surgeries and treatments. Let's look at how we can make a fair assessment of the current buy-sell environment.

Core fundamentals

As I explained in a previous article, pharmacy valuation services rely on four rules of thumb to formulate a justifiable opinion of your store's worth. Any sale or purchase will hinge on close examination of three years' worth of reports in the following areas.

1. Gross sales
   Total up prescription revenue plus front-end sales. Pharmacies on the market generally list in a range of 18 to 22 percent of gross sales.
   
   
2. Gross margin
   Take gross sales and subtract out the purchase cost of pharmaceutical and front-end goods. This is the amount a pharmacy has available to pay expenses, salaries and debt service. Market values range from 1 percent below to 1 percent above the previous year's gross margin.
   
   
3. Dollars per annualized prescriptions
   Tabulate script count for the most recent fiscal year and multiply it by $10 (low end of the valuation scale), $12.50 (medium value) or $14.50 (high value).
   
   
4. Multiple of adjusted cash flow
   Your accountant may refer to this as EBITDA—earnings before interest, taxes, depreciation and amortization. It's a measure of net profit plus non-traditional or non-recurring expenses charged to the store (such as the use of a personal car or phone). Multiply the total by a factor of 2.5 to 3.5 to arrive at low, medium and high valuations.

What changed with COVID-19

In early 2020, pharmacies nationwide refilled about 59 million prescriptions per week. When the pandemic hit, patients started stockpiling their drugs and the figure rose to almost 70 million per week in March.¹ Mature pharmacies navigated through the early part of the pandemic largely by filling existing scripts for patients' maintenance medications.

In contrast, pharmacies that had been open for less than two years struggled during the same period. They didn't have a built-up surplus of maintenance patients—and new prescriptions were practically nil during the March-May timeframe because most physician offices were not seeing patients and hospitals cancelled elective surgeries. The numbers of new prescriptions dropped from about 20 million per week before the pandemic to 11 million per week during April.²

The good news is that, by the end of August, new prescriptions per week had rebounded to about 15 million.³ That's still 25 percent below the pre-pandemic baseline,⁴ but things are trending in the right direction.

Circling back to our four rules of thumb, you can expect pharmacy valuations to be down a bit from previous years by the end of fiscal year 2020, mainly because gross sales and prescriptions declined. At the same time, however, margins have remained at normal levels and adjusted cash flow could very well hold steady. Situations will vary by geographic location and the severity of the impact COVID-19 has had on individual communities.

Selling a pharmacy if you have a PPP loan

One other factor to consider is the impact of the federal Paycheck Protection Program (PPP). Many pharmacies applied for and received PPP loans, which carry a 1 percent interest rate for a two-year term, available in amounts up to 250 percent of monthly average 2019 computed payroll. It's significant to note that the loan amount may be forgiven if used for payroll, retirement benefits, employer portion of health insurance premiums, and some pre-existing debt, rent, mortgage and utility costs.⁵

What does this mean in practical terms? If you've received a PPP loan, you're most likely striving to have it converted to a grant. Grant money would not be counted as business income for tax-reporting purposes. On the other hand, if the loan has not converted to a grant, interest expense may be written off. It's best to review your individual situation with your accountant.

In regard to independent pharmacy valuation during COVID-19, PPP money will not affect the rules of thumb relating to prescription sales or gross margins. Nonetheless, it could impact adjusted cash flow. For example, a $100,000 PPP loan that converted to a grant to cover payroll cannot be written off as an expense; therefore, it would increase adjusted cash flow by $100,000. Again, speak to the financial advisor on your pharmacy acquisition team for direct guidance.

Looking ahead

Whether you're looking to sell or buy a pharmacy at this time, you can get a general sense of financial health by compiling the store's P&L statements for January through June 2019 and comparing them to the same six-month period in 2020. Assume that there will be a dip in the March-April 2020 timeframe, but be sure to assess whether sales and prescription counts started to improve toward the end of this year's second quarter.

Additionally, think a little further down the road. Federal guidance authorizes state-licensed pharmacists to administer COVID-19 vaccinations when they become available.⁶ That development will surely increase traffic at stores providing vaccinations.

What's more, front-end sales should rebound when in-store shopping becomes more routine than current models for curbside or drive-through pickup.

With businesses on the pathway to resuming pre-pandemic operations, look for more pharmacy acquisitions and sales to move forward and close.

^{1. Drug Channels. Five Surprising Facts About COVID-19 Prescription Trends for Retail and Mail Pharmacies. https://www.drugchannels.net/2020/08/five-surprising-facts-about-covid-19.html#more}

^{2. Ibid.}

^{3. Ibid.}

^{4. Ibid.}

^{5. National Community Pharmacists Association. NCPA Member Summary of the CARES Act. http://www.ncpa.co/pdf/ncpa-member-summary-cares-act.pdf}

^{6. U.S. Department of Health and Human Services. Trump Administration Takes Action to Expand Access to COVID-19 Vaccines. https://www.hhs.gov/about/news/2020/09/09/trump-administration-takes-action-to-expand-access-to-covid-19-vaccines.html}