Download - Gordon Brothers

INDUSTRY INSIGHT
RETAIL INVENTORY
UPDATED APRIL 2017
DRUG RETAILERS
CURRENT TRENDS
Reimbursement rates have lagged, while generic pharmaceutical
acquisition prices are rising and squeezing margins
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
U.S. personal consumption expenditures for drug preparations and
sundries are forecasted to grow at an annual compounded rate of 5
percent between 2017 and 2021
45-55%
front-end
90-99%
pharmacy
65-75%
combined
NOTE: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE
MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE
FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN
ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND
THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT
REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY,
INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2017 GORDON BROTHERS GROUP, LLC.
DECREASING
STABLE
INCREASING
ANNUAL REVENUE AND STORE COUNT
7%
6%
Year-over-Year Change
A PPROXIMATE NET RECOVERY ON COST
PROJECTED VALUES
(12-MONTH OUTLOOK)
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
2012
2013
Source: IBISWorld
2014
Revenue ($m)
2015
Store Growth
BY THE NUMBERS
+15.8%
CVS Retail
one year sales growth
year ended 12/31/16
GORDONBROTHERS.COM
+1.617.422.3233
2016
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 Rx inventory would be sold to competitors
in conjunction with the sale of the customer prescription (“script”)
files. Appraisers typically assume that the Rx 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.
LIQUIDATION METHODOLOGY DRIVES VALUE:
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 Rx inventory
are not subject to FDA recalls. Gordon Brothers recommends
monitoring pharmaceutical inventory levels and the treatment of
recalled products as any recalls of a significant quantity of products
within the Rx 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 Rx inventory
in conjunction with the script files. The script auction would occur
concurrently with the sale of the prescription inventory. Both would be
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 the various drug store inventories, for frontend, pharmacy, and script files, to ensure that advance rates remain
within realistic ranges.
Drug retailers’ demand is driven by the
aging of the U.S. population, awareness of health issues, and advances
in medical treatment. The profitability of individual companies
depends on access to medical insurance groups. Large companies
have economies of scale in purchasing and in access to large groups
of customers. Small companies can compete effectively through
convenient locations or special merchandising. The U.S. industry is
highly concentrated; the four largest companies generate about 70
percent of revenue.
COMPETITIVE LANDSCAPE:
Chain stores account for approximately 50 percent of the U.S. retail
prescription market, according to IMS Health. Mail services account
for about 25 percent, independent drug stores for 15 percent, and
pharmacies at supermarkets for 10 percent. CVS and Walgreens
dominate the U.S. chain drug store industry, especially in big cities.
In a move that would further consolidate the market, Walgreens has
agreed to acquire Rite Aid, uniting two of the nation’s three largest
drug store chains.
Over the past decade, retail pharmacy chains, including Walgreens
and CVS, have evolved to become integrated pharmacy healthcare
companies by acquiring pharmacy benefits management companies,
drug wholesalers, specialty pharmacy companies, walk-in clinics, and
other healthcare-related businesses.
Bigger is better
in the competitive pharmacy industry. In the summer of 2015, CVS
Health agreed to acquire Target Corporation’s pharmacy operations.
The deal, worth approximately $1.9 billion, was completed in December
2016, and the first CVS Health pharmacy-within-a-store was unveiled in
February 2017. The purchase of 1,672 in-store pharmacies from Target
gives CVS the size and volume to negotiate better deals from drug
wholesalers, driving down prices on prescription drugs, particularly
expensive specialized medicines. The purchase is also a win for Target,
which previously suffered a loss on its pharmacy business. Target
expects to benefit from increased foot traffic by pharmacy customers
drawn in by lower prices and the well-established CVS brand name
under which the Target pharmacies are now rebranded.
INDUSTRY CONSOLIDATION IMPACTS RETAIL STORES:
In late 2015, Walgreens Boots Alliance, Walgreens’ parent company,
made a bid to purchase its smaller competitor Rite Aid. Walgreens
Boots Alliance’s CEO expressed optimism that the acquisition, which
faces heavy scrutiny from The Federal Trade Commission (“FCC”),
would be approved before the close of 2017.
Amid contention over the deal, the New York Post notes that in March
2017, Walgreens gave the Federal Trade Commission 30 days’ notice it
was going to certify compliance; a notification that a merger applicant
believes it has supplied all the information regulators need to make a
decision on the deal. Thus, Walgreens is expected to certify compliance
by the end of April, according to company sources. Subsequently,
Walgreens will give the Federal Trade Commission 90 days to either
clear the $9.7 billion deal, creating the nation’s biggest drug store
chain, or sue to block it.
If the deal is approved, it would result in 12,800 Walgreens locations,
barring closings and divestitures. As a result, Walgreens will have
outnumbered CVS’ 7,900 locations (excluding future Target locations).
Per an analysis completed by real estate services company Cushman
& Wakefield, there are 14 states where the deal, if left intact by
regulators, would double Walgreens’ current store count; Michigan,
Pennsylvania, and New York would have the highest concentration.
By contrast, there is little overlap in other major markets like Florida,
Illinois, and Texas. “The post-merger Walgreens real estate imperative
will be to minimize cannibalization,” the Cushman & Wakefield analysis
notes, adding that there are numerous Rite Aid and Walgreens stores
in very close proximity to each other throughout the country.
Barring issues with front-end inventory levels and product mix or
assortment, liquidations in the retail drug store segment typically
perform well. For lenders with drug retailers as part of their
portfolio, monthly inventory monitoring and annual or semi-annual
appraisals are recommended to track asset values. Given the
ongoing consolidation in the industry, and what it may mean to
local competitors and smaller chains, partnering with an appraiser
with extensive experience in appraising and disposing of drug store
front-end and Rx inventory remains a critical component of portfolio
management in this segment.
GORDONBROTHERS.COM
+1.617.422.3233