Selling a Specialty Pharmacy

The drug mix and where the money is made

A buyer opens with the mix of drugs by therapy area. A pharmacy concentrated in one disease state, such as oncology or a particular immunology class, has depth and referral sources in that field, though it also depends on a small number of products. Patents expire, new competitors enter, and a drug that supplies a large share of revenue can lose its margin when a generic or a biosimilar arrives. Buyers will ask which medications produce the most gross profit, how long each has been on the market, and what is coming in the pipeline that could change the mix.

Gross profit per prescription is what a buyer watches. Specialty drugs carry large revenue numbers with thin percentage margins, so a few dollars of reimbursement change makes a visible difference. A buyer will want to see acquisition cost, reimbursement and dispensing fees by drug, along with returns, wasted product and inventory write-offs. Inventory is large and expensive. Expiring medication, refrigerated stock and drugs bought in anticipation of orders all appear on the balance sheet, and a buyer will check the valuation method.

Payers, networks and the contracts

Most of the revenue arrives through health plans and pharmacy benefit managers, and those contracts carry heavy weight in a sale. Buyers will ask which networks the pharmacy belongs to, which plans or benefit managers send the largest volume, and whether any of them require the pharmacy to be one of a few preferred or exclusive dispensers. Network status for specialty drugs is narrow in many plans. A pharmacy in a limited network has an advantage that may not move to a new owner without the plan's consent. A pharmacy that is out of network on key plans has a different story to tell.

Contract terms are read closely. Reimbursement formulas, audit rights, clawbacks, and changes to rates that a plan can make with notice all affect the future earnings of the business. Buyers will ask when each contract ends, whether it renews automatically and what happens on a change of ownership. Our post on customer concentration covers why a buyer reacts to a business that depends on a handful of payers.

Manufacturer access and limited distribution

Many of the highest-value specialty drugs are available only through a limited set of pharmacies chosen by the manufacturer. Access to those drugs is an asset, and it comes from an agreement, usually after the pharmacy demonstrates the right capabilities. Buyers will ask which limited distribution drugs the pharmacy holds, how access was obtained, what the manufacturer expects in return, and whether the agreement survives a sale. Some manufacturers review a new owner before they will continue. Others end the relationship. A buyer will want to know before they pay for it.

Manufacturers also supply data requirements, reporting duties and sometimes patient support funding. Buyers will ask for the agreements, the performance scorecards and any correspondence about audits. Strong standing with manufacturers helps the price. A history of complaints or lost access hurts it.

Accreditation and the clinical side

Specialty pharmacies usually hold one or more accreditations that payers and manufacturers require for network participation. These involve standards for clinical programs, patient education, adherence monitoring, handling of temperature-sensitive drugs and shipping. A buyer will ask which accreditations the pharmacy holds, when each is due for renewal, and whether the most recent review found any issues. Lapsed or conditional accreditation can end network status quickly.

Patient support is a large part of what the pharmacy sells. Nurses, pharmacists and patient care coordinators handle prior authorizations, benefit investigations, financial assistance, side effect questions, refill reminders and delivery scheduling. Adherence rates and the number of patients who stay on therapy are signs of how well the program works, and buyers look for them. A pharmacy with a strong clinical team and good outcomes data attracts better contracts. Buyers will ask who leads the clinical program, how long the staff have been there and how difficult they are to replace.

What makes one pharmacy worth more

Pharmacies that command higher prices usually have exclusive or limited drug access, broad payer networks, accreditation in good standing, a large and growing patient base, low turnover on the clinical team, and systems that handle prior authorization and billing efficiently. They have solid compliance programs and audit history. They have manageable inventory and tight controls on high-cost drugs. The owner is not the only person who talks to prescribers and plans.

Value falls when a few drugs or payers dominate, when audits have produced recoupments, when manufacturer access is shaky, when the pharmacy relies on one referral source, or when accounting is loose. Dispensing records that do not match billing records are a serious problem. Our post on quality of earnings reports describes the independent review that buyers often order, and specialty pharmacies tend to face a more detailed version.

Records a buyer will ask for

Expect tax returns, monthly financial statements, and dispensing reports by drug, payer, prescriber and patient count. Buyers want payer and benefit manager contracts, manufacturer agreements, accreditation reports, audit results, a list of licenses and permits, inventory counts with expiration dates, cold chain records, policies and procedures, and staff credentials. They will also want the claims history, insurance policies and any regulatory correspondence. A buyer will compare billing to dispensing to inventory, and every difference needs an explanation. Our guide on getting your financials ready covers the basics.

What has to transfer

Pharmacy licenses, controlled substance registrations, wholesale or distribution permits, and state and local approvals are held by a specific owner and location. Most do not move automatically in a sale. The buyer applies for its own, or the transaction is structured so the license holder stays in place. Rules vary by state and your attorney confirms what applies. Payer contracts, network participation, manufacturer agreements and accreditation each require a separate step, and the timing needs a plan so that the pharmacy keeps dispensing through the change. The structure of the sale matters here, and the post on asset sales and stock sales explains the difference.

The lease needs consent, and the cold storage, packaging and shipping setup should be in working order. Pharmacist in charge and technician credentials need to be in place when the new owner takes over.

How to prepare

Start with compliance. Review audit findings, fix them and keep the documents. Confirm the status of every contract and accreditation, and note renewal dates. Ask each manufacturer, carefully and with your attorney, how a change of ownership is handled. Document the clinical programs and train a second person on prescriber relationships. Tighten inventory and close out aging stock.

When you want to see how buyers might view your pharmacy, read about selling a specialty pharmacy. At Business Advisors of America we build the valuation from your numbers, prepare the materials and screen buyers for the licensing and financing they need.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.