Mike Bollinger - Profile. Independent Pharmacy - Today. Discussion Topics. Independent Pharmacy - Today 6/19/2012. Mike Bollinger June 22, 2012

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1 Mike Bollinger - Profile Mike Bollinger June 22, 2012 Presenting to the members of: Business Management / Marketing, BA - University of New Orleans Manager, Independent Pharmacy - Majoria Drugs Sales Consultant, Independent Pharmacy - Cardinal Health Generic Market Manager, Independent Pharmacy - Cardinal Health Sales Manager, Independent Pharmacy - Cardinal Health Director of Pharmacy Acquisition - Cardinal Health Role in >80 Pharmacy Transitions Valuations Financial Analysis Consulting Matchmaking Financing Structuring Acquisitions 2 Discussion Topics Independent Pharmacy Today Alive and Thriving Expectations for Buying / Selling a Pharmacy Process to Buy / Sell a Pharmacy When and How do you begin the process What is a Pharmacy Worth? Structuring an Acquisition Independent Pharmacy - Today Retail Independents Represent a $92.8 Billion Marketplace By comparison: 2008 = $88 Billion /2009 = $93 Billion Independent Pharmacies in 2010 totaled 23,064 By comparison: 2008 = 22,728 / 2009 = 23,117 Avg. Number of Pharmacies in which each independent owner has ownership in 2010 equaled 1.89 By comparison: 2008 = 1.46 / 2009 = 1.69 Starting to see more multi-store owners Financing Options SOURCE: 2010 / 2011 NCPA Digest, Sponsored by Cardinal Health Independent Pharmacy - Today Avg. Annual Sales per pharmacy totaled $4.02M in 2010 Gross Profit since 1997 Highest Gross Profit as a percentage of Revenues was in 1997 at 25.6% 26.0% 25.0% 25.6% Gross Profit Avg. Pharmacy Dispensed 64,169 Scripts in per day Lowest Gross Profit as a percentage of Revenues was in 2004 at 22.1% 24.0% 23.0% 24.0% Gross Profit in 2010 was at its highest point in the last 11 years at 24% Generic Utilization has increased to 72% and continues to increase Only twice in the last 14 years did Gross Profit fall below 23% as a percentage of Revenues!! 22.0% 22.1% Net Operating Income for 2010 was 3% SOURCE: 2010 / 2011 NCPA Digest, Sponsored by Cardinal Health The average Gross Profit as a percentage of Revenues since 1997 is 23.64% 21.0% 20.0% SOURCE: NCPA-Pfizer Digest 2007, NCPA Digest sponsored by Cardinal Health

2 Are you in that number? Over 1,000 Pharmacies are expected to transition each year Sell to an Independent Sell to Nat l Chain Close their doors Average age of an Owner-Pharmacist is 62 years of age Are you contemplating selling your pharmacy? With this economy, is now the best time to sell a pharmacy? What is my pharmacy worth? Are the $3 Million offers for real? What are the tax advantages / dis-advantages? Do you have an Exit Strategy? 5 10 years Sellers must have a plan Who do you need on your team? Attorney, CPA, Broker, Business Partners, Wholesale Partners, etc. 2 5 years 1 2 years Need to be educated Understand market value of the pharmacy based on historical financial performance Understand the tax implications of the acquisition Immediate? Be prepared to answer Do you want to carry a seller-promissory note? Do you want to continue working after the transition? Do you want to rent / sell your building (if applicable) Are you contemplating owning a pharmacy? How do you want to become a pharmacy owner? With this economy, is now the best time to buy a pharmacy? Purchase an Existing Pharmacy? Start-Up a Pharmacy? What is the pharmacy worth? Do I need a $1 Million to purchase a pharmacy? Is Financing available? Enter a Junior Partnership with an Existing Pharmacy? Purchase an Investment Pharmacy? 2

3 Buyers must have a plan Must haves Good Credit Valid Pharmacist License (State specific) Desire to own a business Good mentor How will you access the capital necessary to purchase a pharmacy? How much cash do you have for equity? How much working capital do you need? Perform due diligence to understand the pharmacy s financial performance Tax Returns, P&Ls, Script Counts, Drugs Dispensed, State Medicaid %, Rx vs. Non-Rx Mix The approach to buy / sell a pharmacy requires thoughtful planning, the advice of professionals, and a plan. You don t want to approach ownership transition when you are under stress from outside influences, facing financial problems, family problems, poor health, or new competition What is the timeframe to sell? Transitioning a pharmacy can take up to 10 years depending upon many factors Motivation to sell Type of Corporation / Company structure ~30% of Independents are C-Corps Financial performance of the pharmacy Time to locate a buyer Work to improve financial fitness of your pharmacy while thinking about selling and while looking for a buyer to maximize your value What is the timeframe to buy? # 1 Factor to slow down a buyer is location, location, location Many buyers want a certain geographic radius which will limit their opportunities Once the buyer locates the pharmacy Anywhere from 2 to 12 months (maybe longer) Perform due diligence, secure financing, make an offer and transition If purchasing real estate, can pro-long the process Who are the buyers? You or the person next to you A staff Pharmacist working in the pharmacy today Thirty Something s (practicing in Retail) Current Pharmacy owner s looking to expand Investment Groups Nat l Chains *** More Buyers in the Marketplace than Sellers *** 3

4 What is the value of a pharmacy? Depends on profitability 3 Key Financial Metrics Gross Profit Labor Expense EBITDA (Earnings Before Interest & Taxes, Depreciation, & Amortization) Adjusted Net Income May depend in annual script count High / Low script volume Increasing / Decreasing script volume Buyers ability to generate future economic return Pharmacy is worth what a buyer is willing to pay for the pharmacy Pharmacy is worth what a lender is willing to lend for the purchase Valuation Calculation Methods To determine Goodwill of the pharmacy: Multiple of cash flow (EBITDA) Percentage of annual revenues Fixed dollar amount times annual number of scripts filled Multiple of Gross Margin Return on Income Approach Performing a Pharmacy Valuation Analyze the financial statements At least three years Federal Tax Returns Interim Income Statements(P&Ls) & Balance Sheet Normalize Expenses (determine true cash flow) Pharmacy software reports Gross Margin reports 3 rd Party Plans Top 100 Drugs Dispensed Generic Utilization Controlled Substances What makes a pharmacy more valuable? Above average profits and key financial metrics Gross Profit of 25% or greater Labor Expense of 10% or less Net Income of 10% or greater High Volume with solid growth year-over-year Niche Markets (compounding, DME, etc.) Fully staffed and managed well Low competition What makes a pharmacy less valuable? Declining script counts Declining margins and profitability Inability to obtain / review accurate financial statements Excessive rent or inability to negotiate long-term lease Excessive labor costs State or local pressures on margins The pharmacy must Enable the buyer to earn market rate compensation Allow for debt repayment of the Total Project Cost with adequate Working Capital Appraise 4

5 Matchmaking Role of the seller Who will market the pharmacy? You may have someone in mind Family member, Pharmacist working for you, etc. Professional Business Broker, Business Partner, Wholesale Partner Internet (web-sites, search engines) Buyer needs to be qualified Work under a Non-Disclosure Agreement (NDA) Full-Disclosure Demonstrate the value of the pharmacy to the buyer Validate / defend your asking price Share your pharmacy financials, data, reports under full-disclosure Show the buyer the ability to earn a living while paying off the debt of the acquisition and building equity Role of the buyer Convince the seller you can operate their pharmacy to continue the legacy they have built Treat customers with same level of service Treat employees with same level of respect Must be qualified and able to show the seller you have the capability to attain the proper financing necessary to purchase the pharmacy The Transition Process Locate the pharmacy Initial Due Diligence Term Sheet presented to the seller Follow-Up Due Diligence Secure Financing Draft the Purchase Agreement Asset, Stock, Unit Include Limited Power of Attorney (where applicable) Perform Physical Inventory Closing Date to fund the transition and transfer ownership Apply for licensing (SBOP, DEA, et al) Financing the Acquisition Banks SBA Preferred Lenders Conventional Lenders National & Local Seller-Promissory Note Tertiary Lenders (gap-lending for equity requirements) Investment Groups Acquisition Breakdown Asset Purchase vs. Stock Purchase Advantages / Dis-Advantages of each Typical Asset Purchase includes Goodwill plus Inventory Goodwill relates to the assets of the pharmacy including the pharmacy files In some cases, the buyer may decide to purchase Accounts Receivables 5

$1,618,750 (SBA) Buyer Equity $381,250 Total $2,000,000 Store does compounding and diabetic shoes 3 X EBITDA = $1,526,889 Buyer Equity

6 Acquisition Example 2011 Pharmacy Breakdown: Revenues $5,962,666 COGS $3,958,234 Gross Profit $2,004,432 (33.62%) EBITDA $508,963 or 8.54% of Revenues Sale Price Breakdown: Goodwill $1,525,000 Inventory $475,000 Total $2,000,000 Financing Breakdown: Bank Borrowed $1,618,750 (SBA) Buyer Equity $381,250 Total $2,000,000 Store does compounding and diabetic shoes 3 X EBITDA = $1,526,889 Buyer Equity Breakdown: Buyer s Cash (un-borrowed) $131,250 Seller-Promissory Note $250,000 (6% Fixed Interest) Total Equity $381,250 Buyer Equity is 25% of Goodwill 6

One Destination, Ownership. to Pharmacy

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