Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Independent Pharmacies
Transcript
- Lucas: One of the quieter roll-up stories in American healthcare right now involves a place nearly every adult visits at least a few times a year: the local pharmacy. Luna: The independent corner drugstore, not the CVS or Walgreens. Lucas: Exactly. There are roughly 21,000 independent retail pharmacies in the United States as of this year. And over the last three or four years, private equity firms have quietly acquired several hundred of them — often forming small regional chains or 'pharmacy services organizations' that function a lot like dental or veterinary roll-ups we've talked about before. Luna: What's the play here? Are they just consolidating to negotiate better with PBMs? Lucas: That's a big part of it, but the model has a few layers. Let me use one specific case. A firm called Alpine Investors — they're based in San Francisco, known for buying founder-led businesses — started a platform called CAP Rx back in 2021. CAP Rx has now acquired over 40 independent pharmacies across the Southeast and Midwest. They operate under a 'central fill' model. Luna: Central fill — so they have one large facility that does the bulk of the dispensing for all the locations? Lucas: Right. Instead of each independent pharmacy having its own pharmacist counting pills behind the counter, the prescriptions are sent electronically to a central facility where automation fills them. Then they're shipped to the local store for pickup. That cuts the labor cost significantly — maybe by 30 to 40 percent per prescription. Luna: But the local pharmacist is still there for consultations, vaccinations, that kind of thing. Lucas: Yes. The model preserves the face to face relationship, which is important for patient trust and for regulatory reasons. In many states, a licensed pharmacist must own at least 51 percent of the pharmacy. So the roll-up structure uses a management services organization — an MSO — that owns the hard assets and provides the services, while the pharmacy itself is technically owned by a pharmacist. Luna: That MSO structure is common in dental and vet roll-ups too. Lucas: Exactly the same playbook. The MSO takes a management fee, typically 5 to 7 percent of revenue. In return, it handles payer contracting, technology, supply chain, and back-office. The pharmacist-owner keeps a portion of the profits and often gets equity in the larger platform. Luna: What does the typical deal look like? Are we talking single-store purchases? Lucas: Mostly single-store acquisitions. Independent pharmacies typically sell for 4 to 6 times EBITDA, and the EBITDA margin for a well-run independent is around 10 to 15 percent. So a pharmacy doing $3 million in revenue might throw off $400,000 in EBITDA, and sell for maybe $2 million. Not a huge check by private equity standards, but you do 40 of them and you have a $80 million enterprise. Luna: And the roll-up gets better reimbursement rates from PBMs because of the combined scale. Lucas: That's the most important financial driver. Independent pharmacies often get reimbursed by PBMs at rates below their cost to acquire the drug — that's called 'negative spread.' A larger entity can push back. CAP Rx, for example, claims it negotiated a 12 percent improvement in reimbursement rates across its network within the first year. Luna: Twelve percent on a thin margin is huge. But let's talk about the patient side. When your local pharmacy gets bought by a private equity-backed roll-up, does anything change for you? Lucas: It depends on how well the roll-up is run. In CAP Rx's case, they keep the local name above the door. The same pharmacist is usually there. But some things do change. The central fill model means your prescription might be filled 50 miles away. That can add a day to the wait time if you need a same-day refill. And if the MSO is cutting costs aggressively, you might see fewer brand-name drugs stocked, more generics. Luna: There was a story last year about a chain called Medly Pharmacy — a venture-backed digital pharmacy that collapsed. Is that the same risk here? Lucas: Different model. Medly was a tech-forward startup burning cash on delivery and marketing. These private equity roll-ups are usually cash-flow positive from day one. The risk is different: it's financial leverage. If the platform takes on debt to fund acquisitions, and reimbursement rates from PBMs get squeezed further, the whole thing could come under pressure. Luna: So the roll-up is essentially a bet that scale will protect margins. But what if PBMs get even more aggressive? Lucas: That's the existential question. The Federal Trade Commission has been investigating PBM practices since 2022. Earlier this year, they released an interim report citing evidence that PBMs steer patients to their own affiliated pharmacies. If regulation forces transparency on drug pricing, it could actually help independent pharmacies. But if PBMs simply tighten the screws, the roll-up could become less profitable. Luna: Are there any other private equity players in this space besides Alpine? Lucas: Several. There's a firm called Cencora — formerly AmerisourceBergen — that's not private equity but has been acquiring independents. On the PE side, there's a platform called Pharmacy Partners, backed by Stonehenge Capital. And a firm called Vistria Group acquired a chain called KeyCentrix in 2023. It's still a fragmented market, though. The top 10 consolidators probably own less than 5 percent of independents. Luna: Which means there's room for a lot more consolidation before regulators start paying attention. Lucas: That's exactly what the deal teams are thinking. And the demographic tailwind is strong: the average independent pharmacist is about 55 years old. Many want to retire but don't have a succession plan. A roll-up can offer an exit at a multiple they couldn't get selling to a single buyer. Luna: It's almost like a retirement solution for the pharmacist, wrapped in a private equity deal. Lucas: It really is. And that's why these deals tend to be friendly. The seller gets liquidity, the platform gets a new location, and the community keeps a pharmacy that might otherwise close. At least in theory. Luna: But the theory only holds if the platform doesn't load up too much debt or start cutting services. There's a tension between financial engineering and actually running a healthcare business. Lucas: And that tension is exactly where we should end today. Look, speaking of running a show that depends on trust and not on financial engineering — a quick honest thing. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these deep dives possible. Luna: If these conversations have moved your work forward in some small way, it's a quiet way to keep them ad-free and independent. Lucas: So back to the pharmacy roll-up question. The real test hasn't come yet — we haven't seen a full economic cycle test this model. If we get a recession and prescription volumes drop, or if Medicare reimbursement cuts hit, the platforms with the most debt will be the ones that struggle. Luna: And that's when we'll see whether these roll-ups are building lasting businesses or just financial plays. Lucas: Right. For now, the math works. But the patient experience and the regulatory landscape are the two wild cards. Next time you pick up a prescription at an independent pharmacy, it's worth asking: who owns the building?