What Buyers Look For in a Compounding Pharmacy

Where the prescriptions come from

A buyer starts with the referral base. A compounding pharmacy lives on prescribers who send patients because they need a dose, a strength, a form or an ingredient that a manufacturer does not make. Hormone therapy clinics, dermatologists, veterinarians, pain management practices, pediatric offices and fertility practices all send different kinds of work, and the mix tells a buyer what kind of pharmacy this is.

The buyer will ask how many prescribers account for most of the volume. A pharmacy that depends on two or three clinics will get questions about what happens if one of them opens its own dispensing arrangement or moves to a competitor. Our post on customer concentration explains why buyers pay less for a revenue line that rests on a few names, and in compounding it is the prescriber list that carries that weight.

Referral relationships also tend to be personal. If you are the pharmacist who takes the call from the physician at seven in the evening, the buyer will want to know whether those physicians will keep sending work to the person who replaces you. An introduction plan for the first few months after closing can settle a lot of that worry.

How the pharmacy gets paid

Payer mix is the second large question. Some compounding pharmacies take mostly cash and self-pay patients. Others bill insurance, workers' compensation carriers or pharmacy benefit managers. Each has its own risk. Cash pay is easier to collect and harder to scale. Insurance billing opens a larger market, yet it brings audits, reimbursement changes and clawbacks that a buyer will want to examine closely.

Buyers will ask for a report showing sales by payer type and by product category over several years. They will check the gross margin on the top products and look for any single formulation that makes up a large share of profit. A pharmacy whose profit depends on one or two preparations should expect questions about what happens if a regulator, a supplier or a payer changes the rules on that product.

Workers' compensation and pain cream billing in particular has drawn scrutiny in the industry, and a buyer will probably ask about it directly. Be ready to explain the history of any payer that has audited, recouped or stopped paying the pharmacy.

The cleanroom, the equipment and the inspection record

A buyer will walk the compounding area. They look at the cleanroom or the hood setup, the air quality testing records, the cleaning logs, the garbing area, the balances and the mixers. Sterile compounding needs controlled air and documented testing. Nonsterile work needs its own set of procedures. Either way the buyer wants to see that the equipment is calibrated, the records are current and the room has been maintained according to the standards that apply to the work you do.

Equipment age matters because cleanrooms and ventilation are expensive to rebuild. A buyer who finds that the room needs a major upgrade will take that cost off the price, or will ask for a credit at closing. Ask your certifier for a recent report before the buyer asks for one.

Inspection history is read very closely. A buyer will ask for every state board inspection report, any warning or deficiency letter, and any FDA contact, along with the responses you sent. A clean history helps. A history with findings that were corrected promptly and documented is still fine. A history with open items, repeated findings or a recall is a different conversation, and it is better to have it early than to have the buyer find it in diligence. Our post on due diligence describes how that review tends to go.

Licenses, registrations and contracts

What has to transfer is a long list, and it is where many pharmacy deals slow down. The pharmacy permit, the state board registration, any non-resident licenses for shipping to other states, and the DEA registration if the pharmacy handles controlled substances do not always move with the business. In many cases the buyer needs to apply for new licenses or file a change of ownership, and the approval time can run for months. Rules vary by state and your attorney confirms what applies to your pharmacy.

That timing affects the structure of the deal. A buyer may ask for a period where they operate under a management arrangement while approvals come through, or they may buy the assets and wait to close until the permits are in hand. Whether you sell assets or stock also changes who carries the history of the pharmacy. Our post on asset sale versus stock sale covers the trade-offs.

Beyond the licenses, a buyer will want the lease, the supplier agreements for active ingredients and chemicals, the shipping arrangements for temperature-sensitive products, the software contracts for dispensing and billing, and any payer contracts. Pharmacist employees, technicians and the pharmacist in charge also matter. A pharmacy cannot operate without a named pharmacist in charge, so a buyer will want to know who that is and whether that person is staying.

What tends to sink a sale

The common reasons are easy to list. A regulatory finding that nobody mentioned. A single payer or product that turns out to be most of the profit. A pharmacist in charge who plans to leave at closing. A cleanroom that fails certification during the buyer's visit. Records of ingredient sourcing that do not match the invoices. Employees who learned about the sale before the owner told them.

Confidentiality helps here because physicians and patients tend to be nervous about a change of ownership. We market a pharmacy without naming it and ask buyers to sign a nondisclosure agreement before they see anything that identifies it. Our post on how we market a business confidentially explains the steps.

How to prepare the pharmacy

Start with the paper. Pull the inspection reports, the certification records, the license list with renewal dates, and the policies and procedures into one place. Get the books to agree with the dispensing system, and be ready to break out sales by payer and by product. Fix the small findings in the cleanroom before someone else finds them.

Next, look at the people. Make sure there is a second pharmacist who knows the work and can serve as pharmacist in charge. Introduce your buyers, once there is one, to the top prescribers in a way that the physicians find comfortable.

If you are considering selling a compounding pharmacy, we begin with a valuation built from your own numbers, then prepare the materials a buyer and their lender will expect. At Business Advisors of America we work with owners from the first valuation through the closing, and a conversation about timing for the licenses is a good place to start.

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.