The Pharmacy Industry Roll-Up in South Dakota

By Brad MacLiver
Authorship and profile at Google


SD Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate
               
A principal reason for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Consolidated businesses also have less risk from the impact of an unsatisfied customer and have the reward of being able to recruit, or keep, key employees.

An example of an industry roll-up can be seen with the pharmacy industry in South Dakota. It is a well established industry and is still experiencing sales growth. However, pharmacies and drug stores in SD have seen a steady decline in their profit margins due mainly to government regulations, even as sales increase. There has also been a shortage of pharmacists - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of South Dakota pharmacies, the roll-up is a necessity due to declining net profits ratios. Companies that are acquired in a roll-up are usually small independently-owned businesses whose owners believe in the economic benefits of combining forces with a larger organization, or simply need an exit strategy. In the pharmacy industry roll-up, independents have been a majority of the acquisitions, but there has also been a consolidation of a number of the larger pharmacy chains in South Dakota.

During the South Dakota pharmacy industry roll-up pharmacies with better financial wherewithal are acquiring their local competition and combining two or more stores into a single location. This results in more customer traffic through a single location and reduces the expenses that come with multiple locations. This can dramatically drive up total sales while driving down the administrative and overhead costs per customer.

To help fund pharmacy acquisitions during the South Dakota roll-up, specific funding programs have been developed. These SD pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an individual South Dakota pharmacy business, or an investment group, the capital to acquire and combine pharmacies in geographic areas.

Funders are willing to provide the capital for the pharmacy roll-up because they recognize that combining the individual pharmacy businesses provides a greater total business value than if each individual pharmacy value were added together. This synergistic value reduces the risk of funding the individual acquisition.

When considering the buying, selling, or financing a pharmacy, whether an independent drug store, or multiple pharmacy locations,  due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a pharmacy owner in South Dakota through the maze of details will benefit the pharmacy owner in making the best business decision.

All transactions tied with the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the South Dakota pharmacy industry should be calculated by a company that has in-depth knowledge of the South Dakota pharmacy. Simple accounting formulas used by many companies for estimating value does not provide an accurate picture because the simple formulas do not take into account the aspects that are causing the SD pharmacy industry roll-up.

The factors of the market which are stimulating the pharmacy industry roll-up are also having downward pressure on the pharmacy business valuations. Pharmacy owners have been paying attention to what has been occurring in the pharmacy industry. Even while profit margins slip, new regulations are being imposed, and as reimbursements are pared down there is wide expectation that the business values in the pharmacy industry will continue to slide to lower levels, and thus the South Dakota pharmacy industry roll-up will continue.

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