Beware of the so-called “Slam Dunk” deal

Steve Mize, ASA September 15, 2020

GCF was engaged to value a pharmacy and the lender quickly explained how “strong” the deal was even stating: “This is a slam dunk!” So, we began the due diligence process and immediately discovered:

Profit margins well above the industry average.

Initial thoughts suggested “compounding” (which typically carry a higher profit margin). However, the lender provided limited data for actual prescriptions filled.   So, we requested:

  • Total Rx filled
  • Rx average price
  • % of third party insurance vs cash
  • List of suppliers
  • List of the top 10 Rx sold
  • Top 10 referral sources   

Upon review of the above data points, we discovered:

  1. The amount of “cash” sales were astoundingly higher than the industry average;
  2. The top 5 Rx were narcotics (think of oxycodone) and represented the majority of the Rx filled;
  3. There were 3 referral sources (all pain management practices) that accounted for nearly 50% of the total Rx.  We uncovered numerous articles about “pill mills” and their referring doctors (typically pain management practices).

So, did the value support the loan amount?

NO. Here’s why:

On the surface, cash flow supported the purchase price, BUT, further due diligence uncovered risk factors that were unfavorable to value. The deal was not that “strong” after all.