Date June 2018
Approximate net recovery on cost
By the Numbers - Y/Y Consumer Price Index
- Major modifications or a repeal of the Patient Protection and Affordable Care Act would lower the number of insured patients, and thus the number of prescription drug sales
- The pending CVS/Aetna merger is poised to challenge industry norms for pricing and supply management
- Approximately $215.0 billion in brand-name pharmaceutical sales will be exposed to generic competition from 2015 through 2020
Liquidation methodology drives value: For liquidations in the drug store segment, a going-out-of-business (GOB) sale would include a twofold approach in which the front-end inventory would be sold separately from the pharmacy (Rx) inventory. Prior to the sales of the front-end inventory, the pharmacy inventory would be sold to competitors in conjunction with the sale of the customer prescription (script) files. Appraisers typically assume that the pharmacy inventory would recover at a rate of 90 to 99 percent of cost, barring open packaging and expired or near-expiration product. It is imperative that the sale of the script files and Rx inventory occurs prior to or at the outset of the GOB sale. Running the script file/Rx inventory sale after the liquidation sale has begun would lower the value of the script files as pharmacy customers would immediately seek new pharmacies at which to purchase their medications, reducing the number of transferable prescriptions. The net impact would be a reduction in total value for the prescription list, which is typically a key component of value in drug store dispositions.
Due to the health and safety risks associated with prescription drug usage, pharmaceutical manufacturing and sales are heavily regulated by the U.S. Food and Drug Administration (FDA). As a result, pharmacies are vulnerable to prescription drug recalls. For the purposes of an inventory appraisal, Gordon Brothers assumes all pharmaceutical products contained within a company’s pharmacy inventory are not subject to FDA recalls. Gordon Brothers recommends monitoring the pharmaceutical inventory and treatment of recalled products as any recalls of a significant quantity of products within the pharmacy inventory would have a negative impact on recovery values.
The value of script files is dependent upon the number of active files in conjunction with the number of competitors in the area willing to purchase. As part of the liquidation process, the agent would contact local pharmacy competitors to gauge interest in the pharmacy inventory in conjunction with the script files. The script auction would occur concurrently with the sale of the prescription inventory, both being sold to winning bidders at negotiated prices. In terms of the appraisal analysis, pharmacy sales are excluded from the sales capacity of the front-end liquidation model so as not to overstate the front-end merchandise sales capacity. Front-end net recovery rates typically range from 40 to 50 percent on cost. It is imperative for lenders with clients in this industry to partner with an experienced appraiser to understand the value of store inventories, both front-end and pharmacy, as well as script files, to ensure that advance rates remain within realistic ranges.
Increase in generics: According to data from EvaluatePharma, approximately $215.0 billion in brand-name pharmaceutical sales will be exposed to generic competition from 2015 through 2020. However, this loss of patent exclusivity is trending at a lower rate than that of 2010 through 2015, meaning fewer new drugs will enter the market through 2020 than the prior five-year period.
Nevertheless, lower-cost generic equivalents will continue to enter the market, benefiting the industry, as their lower cost enables more consumers to comply with their medication dosage and refills. Despite this influx, some revenue constriction will occur as consolidation among generic manufacturers will lower price-based competition among generic drug makers, causing the industry’s generic acquisition cost, or the price of purchasing generic drugs from manufacturers, to increase.
According to IMS Health’s 2017 Medicines Use and Spending in the U.S. report, the number of prescriptions dispensed by chain stores increased 18.5 percent from 2012 to 2016 (latest data available), and 89.0 percent of prescriptions dispensed in the United States in 2016 were generic. Comparatively, independent retail channels dispensed fewer prescriptions, while food and big-box stores, such as Walmart, captured a larger share of the prescription market, contributing to the drop in revenue for 2017 (-2.8 percent).
The Amazon effect: In the third quarter of 2017, Amazon began selling an exclusive line of over-the-counter medications and health care items called Basic Care. The new line challenges traditional drugstore retailers and poses direct competition for brands like Tylenol and Advil, among many others. The Basic Care brand includes 60 items produced by healthcare supplier Perrigo, and although exclusive to Amazon, the brand itself is not owned by Amazon.
Amazon’s efforts to become a wholesale distributor for prescription drugs however, have not been as successful. As of late October 2017, Amazon had received regulatory approval from approximately 12 states to do business as a pharmacy wholesale distributor, according to a review of public records by the St. Louis Dispatch. However, it was announced in April 2018 that Amazon had “shelved a plan to sell drugs to hospitals” based on reporting from CNBC. It was also noted that Amazon had cited “complexities around selling in bulk to large hospitals and building a logistics network to handle pharma delivery” as the reason for the reversal. In order to operate as a consumer prescription provider, Amazon would need to obtain a pharmacy license. For the time being, short of an acquisition or partnership with an existing provider, it does not appear that Amazon will make a significant pharmacy play, but it remains to be seen whether that will change and what the impact would be to traditional drug retailers as well as to major online providers such as Express Scripts Holding Co.
Potential merger implications: The biggest potential disrupter to the Drug Stores industry may be CVS Health’s $69-billion dollar acquisition of Aetna, which was announced in December 2017. CVS currently controls approximately 29 percent of the pharmacy and drug stores market. In March 2018, CVS stockholders approved the merger, and, as of May, the company commented that it was making “good progress” on getting regulatory approval for the deal. The CVS/Aetna deal is one of two major mergers in the health-care industry that are under antitrust scrutiny, the other being the acquisition of Express Scripts Holding Co. by Cigna Corporation. If the CVS/Aetna merger is approved, the combined company will control a pharmacy, a Pharmacy Benefit Manager (PBM), and an insurer, representing the full supply chain from drug manufacturer to consumer. The deal could potentially impact the current and future state of the pharmacy business resulting from the combination of the United States’ largest pharmacy chain, one of its largest PBMs, and its third largest health insurer.