As the financial year draws to a close, we find ourselves reflecting on the many conversations had about the “state of the market” for pharmacy transactions. It’s a topic that seems to be constantly on people’s minds, and for good reason. With all the changes and uncertainties faced by the industry, it’s only natural to seek some clarity. This article takes a deep dive into the AP Group transaction data to share what we’ve learned in the financial year that was FY24.
To get the most accurate snapshot, we focus on the four key indicators: Average Sale Price, Capitalisation Rates, Time on Market, and Settlement Length.
Average Sale Price:
Despite all the anxiety around recent industry changes and interest rate rises, sale prices remained broadly steady in FY24 at $2.1m, in line with historical averages.
It’s worth highlighting that regardless of the price bracket, when seeking to purchase a pharmacy business, buyers have shown a tendency to favour consistency of trade. Conversely, buyers view an assessment of potential for growth in a pharmacy business with caution. In summary, the pharmacies that offer stability and long-term security are still attracting market premiums, as the fundamentals of supply and demand continue to favour sellers.
Capitalisation Rates:
Average capitalisation rates (cap rates) used in bank valuations for AP Group listings remained steady in FY24. This is a trend that was echoed by Robert Hughes, Partner at leading healthcare valuer Pitcher Partners. Hughes remarked that “average capitalisation rates across the country remained steady at around 17%, with valuers balancing both the risk of 60 Day Dispensing (60DD) and the potential upside of new revenue streams. We note, as has always been the case, that we are seeing variation in cap rates based on location and the nature of the pharmacy operation.”
While the sales premiums to valuation have softened slightly off the back of 60DD, we continue to see, on average, pharmacies selling at premium to valuation. More recent activity indicates premiums may be returning to FY23 levels and we will watch this space with great interest as we move into FY25.
In our view there are two key drivers which we expect will impact sales cap rates (i.e. sale price compared to valuation) in the coming financial year;
- Whilst it is early days, the industry feels positive about the recently announced 8th Community Pharmacy Agreement (8CPA) announcement, which has helped to quell concerns on the potential future impacts of 60DD. In addition, those of us involved in pharmacy recognise how resilient the industry is and feel confident it will evolve and pivot like is has done many times before.
- Generally speaking, there continues to be a shortage of supply to meet market demand. This market dynamic continues to favour sellers, with heightened competition among buyers forcing prices up. Whilst it may seem counter intuitive given the events of FY24, on balance the market conditions continued to favour vendors.
Given the certainty afforded by the newly signed 8CPA, we may see an increase in listings coming to market as vendors who have been biding their time look to capitalise on the favourable conditions. This was our experience back in 2020 following signing of the 7CPA. A sharp increase in supply could have the effect of softening sales cap rate premiums, which creates some urgency for vendors considering a sale to start that process sooner rather than later to beat the rush.
Time on Market:
Strong demand for pharmacies has meant that time-on-market, from listing through to sale, has remained stable at an average of 1.3 months. Buyers are aware that there will likely be many competing buyers for listings and are therefore motivated to complete their review and submit an offer in quick time. Notably, AP Group received offers at or over the indicative valuation price within 72 hours for 60% of our listings in FY24.
Settlement Length:
Average settlement time is a critical indicator as it represents the longest phase of the sale process. Here we are referring to the time elapsed between a sale (signed Heads of Agreement) and settlement. The announcement of 60DD at the tail end of FY23 resulted in an immediate spike in settlement timeframes. The announcement itself, and the lending challenges that occurred in the months immediately after, saw an increase in timeframes by one month per transaction. The good news is that our average settlement length has come down significantly for the FY24 financial year and is now tracking faster than before the 60DD announcement, at around 5.5 months per transaction.
It should also be noted that the lengthy Pharmacy Council approval timelines for some states, NSW for example, have skewed the average settlement times. A valuable statistic that we also refer to is the average time it takes post sale to submit an application to the relevant state authority, and we have managed to reduce this from an average of four months to three months in FY24. This is a direct result of the hard work of our wonderful admin, finance and legal teams who are the quiet achievers of AP Group.
Observations & Conclusions
FY24 has certainly been a big year. There have been several macro factors creating uncertainty within the industry, leading to a range of opinions on what the future holds. Whilst the opinions of most have been buoyant throughout, we hope the arrival of the 8CPA will put some of the few concerned minds at ease. While we appreciate the different positions, we’ve always focussed on the numbers, and the market stats say that the pharmacy industry is still going strong.
At AP Group, we continued our growth trend in FY24, and we’re really proud to say, had our biggest year on record. For the second year running we will transact well over 100 pharmacies, and our legal and finance divisions will be involved in 100 plus transactions in their own right.
In summary, the market still views pharmacy as a solid investment option. The cap rates used by valuers hasn’t materially changed so purchasers can still access funding, and as long as buyer demand outweighs the supply of opportunities on the market, it is likely buyers will need to pay premiums above bank valuation if they want to secure a pharmacy. In our view, premiums are driven by generating the highest possible level of competition, which is why AP Group will continue to focus on building upon our database of qualified buyers, which is already the largest in the industry by some margin.
Predictions for FY2025
We expect pharmacy sales will remain buoyant in FY25 with supply and demand dynamics continuing to favour sellers. In addition, the stability afforded by the 8CPA should support strong sales cap rates continuing into FY25. That said, now that the 8CPA has been announced, and is largely seen as positive for the industry, in the coming months we expect to see an increased number of businesses coming to market. If the supply side does increase materially, there is a chance that the balance will tilt back towards favouring buyers, though this remains to be seen. The message for vendors considering a sale would be to act now while the market conditions are at their most favourable.
Written by Jack Brown, NSW Sales Manager – AP Group
AP Group are the leading pharmacy experts in Australia, helping hundreds of pharmacists into ownership every year – our team can help with sourcing finance for your purchase, as well as providing the right legal advice to help you navigate the process.
We connect existing pharmacy owners with over 5000 ready and eager investors via our cutting-edge online Data Room. Our Data Room keeps confidential listing data secure and allows buyers to make informed decisions on each of our pharmacies for sale.
About the Author:
![](https://news.apgroup.com.au/wp-content/uploads/2024/05/Jack_Brown.jpg)
Don’t let the suit fool you. On the weekends you’ll find Jack fly fishing, camping with his kids, rock pooling or cheering for the Tiges (a shame, we know). And just like you’ll find Jack excelling in several outdoor hobbies, you’ll also find he’s excelled across several industries in various roles. From owning small businesses to running bars to working as a strategic consultant for ING — Jack is a man of many talents.
Having bought, built and sold several small businesses over the last 15 years, Jack knows a thing or two about the mechanics of business — and he draws on this experience to help you buy or sell your pharmacy with confidence.
Business aside, Jack has thrived in several senior roles. He worked as a Strategic Consultant for ING (responsible for assessing the existing asset portfolio, feasibility analysis’ and strategic modelling). He also worked as a Strategist and Project Manager at Right Angle Studios, responsible for strategic insights that would inform the overall business strategy. See we told you, a man of many talents.