Insights
Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published in the Ontario Pharmacy Association, June 2020 – by Mike Jaczko, Partner & Portfolio Manager at KJ Harrison Investors, and Max Beairsto, Pharmacist & Valuation Analyst with EVCOR
Open a newspaper, look at a billboard or listen to a political leader, and you’ll probably see or hear someone commending front-line workers in the fight against COVID-19. No doubt, healthcare providers and first responders deserve special recognition as heroes in these very challenging times. But it takes nothing away from their contributions to recognize those of another group of Canadians who are working every day, under enormous stress, to help safeguard the health of all of us: pharmacists. And unlike many other essential workers, they often have the added burden of having a business to run during a severe economic crisis.
We have some idea of the challenges they are facing. We’ve worked with hundreds of pharmacy owners over the years, providing wide-ranging advice on business valuation and strategy, transition planning, estate and tax planning, and wealth management. We are also pharmacists ourselves. And since the COVID-19 crisis struck, we have fielded plenty of panicked calls from pharmacy owners. They see that they are among the few people going to work every morning. They see fewer customers walking through their doors. They see other storefronts closing. They wonder if theirs might be next.
We understand the fear. After all, many pharmacists have not only their net worth, but also their personal sense of worth, tied up in their businesses. Yet we also see reason for optimism. In fact, we believe Canadian pharmacies will survive the COVID-19 environment and continue to be valuable businesses – both for owners and for potential acquirors – when it is over. That’s not only because governments at all levels have been quick to offer financial support for small and medium-sized businesses. (See below for a list of useful resources.) It’s also because we believe pharmacies can emerge from today’s crisis even stronger than they were before, if they position themselves to capitalize on the opportunities in the market.
Let’s consider the immediate impact of COVID-19. As essential services, they have remained open. With the exception of medical clinic dependant practices general retail pharmacy sales has not seen a seismic shift in community pharmacy patient sales. Where there has been a big change is in the number of telephone- and delivery-based consultations, which are up significantly, for obvious reasons. We know, these consultations are relatively labour-intensive, and one result is that pharmacy staff layoffs have been few, even though foot traffic in many cases has plummeted.
The rise in remote consultations and decline in foot traffic may reflect a long-term trend that the COVID-19 environment may have accelerated: the move to online. While pharmacy practitioners have historically remained early adopters of technology, the impact goes beyond that. An estimated 20% of Canadians who had never bought anything online before have made their first online purchases since the crisis began. Based on anecdotal information, this may be affecting front-of-store sales in many pharmacies and may represent a major challenge for owners both now and in the future. Only time will tell whether these changes in buying patterns are temporal or more permanent in nature.
Yet we believe there are opportunities for pharmacies to rise to the challenges and help position themselves advantageously for when the economy emerges from the pandemic. On a general level, they need to pay attention to retail trends; people are buying different things now, and they might for a long time. More specifically, the reality is that in many communities, other retailers will be closing their stores permanently; that could open up ways for pharmacies to broaden or sharpen their front-of-store product selection.
It is also a good time to get creative with products and services, especially given that pharmacies have remained open. They could, for instance, offer product from other retailers that have been mandated or forced to close during the crisis, perhaps for a commission. They might also think about broadening their approach to delivery; for instance, could they tap third-party delivery companies to expand their reach? As well, it might be time to consider relocation (carefully) once leases expire. Could a new location better maximize front-of-store opportunities, or be better-suited for arm’s length transactions and social distancing? Remember, some of today’s extraordinary measures might become tomorrow’s new normal.
The fact is, many if not most pharmacy businesses are weathering the current storm quite well. And while no one wants to take unfair advantage of a public health crisis, commercial opportunities are out there. These realities are not lost on acquirors in the pharmacy industry. In fact, we have seen early indications that the valuation of pharmacies has remained largely intact during the crisis. Acquirors expect some fluctuation in revenue over the coming months, but not enough to throw long-term value into question. If anything, the pandemic has reinforced the essential nature of pharmacies and the durability of the sector, and so they remain valuable businesses and coveted investments.
Acquirors recognize that; pharmacy owners should, too. So they should consider the current crisis as an opportunity to review their business plans and personal road maps. How can they maximize profitability and value? What can they do to ensure that their personal investments and retirement plans are appropriate for the new realities of financial markets? Do they need to revisit their succession strategy or plan for one in the first place?
It might seem strange to emphasize long-term planning in the midst of a crisis, but pharmacy owners cannot afford to lose sight of the enduring value and potential of their pharmacies. Yes, there are challenges now, but there are and will be opportunities, too. Responding to them can help ensure that pharmacy owners and their businesses not only survive, but thrive, into the post-COVID-19 environment.
Some useful COVID-19 support resources for pharmacy owners:
Federal Government of Canada COVID-19 Response Site
BDC – Business Development Bank of Canada
https://www.bdc.ca/en/pages/special-support.aspx?special-initiative=covid19
Canada’s COVID-19 Economic Response Plan
https://www.canada.ca/en/department-finance/economic-response-plan.html#businesses
Good Overview Website
https://www.freshbooks.com/blog/covid-19-canada
The Globe and Mail – Small Business
https://www.theglobeandmail.com/business/small-business/
EVCOR Website
Canadian Foundation for Pharmacy
https://www.cfpnet.ca/publications/details/id/3
Mike Jaczko, BSc. Phm, RPh, CIM®, FEA a pharmacist by background, is a portfolio manager, partner and member of KJ Harrison Investors, a Toronto-based private investment management firm servicing individuals and families across Canada. For more information on this topic, email mjaczko@kjharrison.com.
Max Beairsto, B.Sc. Pharm., MBA, CVA is a pharmacist and valuation analyst with Enterprise Valuators Corporation (EVCOR), an Edmonton-based business valuation firm that focuses on business valuations and sale advisory of small and mid-sized private companies. For more information on this topic, email max@evcor.com.
