A financial checkup for pharmacies

February 15, 2010

Pharmacies are experiencing financial, regulatory and reimbursement challenges that have increased pressure on their operations. A regular review of financial circumstances and business options can help pharmacies stay afloat in turbulent times.

It is critical that pharmacies understand the current business environment. The challenges pharmacies are facing may be worse for their lenders, software licensors, and suppliers, and the service providers with whom they do business. Financial difficulties experienced by any of these entities have the potential to jeopardize the ability of a pharmacy to continue operating its business. Keeping up-to-date on the condition of those third parties is crucial for the smooth operation of the pharmacy. This allows the pharmacy to anticipate problems and work to resolve difficulties to protect the pharmacy's unique interests in or with the troubled third party.

In addition, many pharmacies lease the land on which they operate from private third-party lessors. The lease agreement defines the relationship between these parties. In many cases, such leases contain clauses specifically drafted to protect possession of the property in the event of a foreclosure proceeding or a bankruptcy proceeding. It is critical to understand these clauses, to the extent they exist, and to understand how foreclosure and bankruptcy laws affect the pharmacy's continued rights as a tenant when the landlord experiences financial difficulties or legal actions.

If the pharmacy is currently in default, a review of the loan documents should pinpoint the specific default and allow the pharmacy to develop a plan to address the deficiency.

A default under a loan agreement, even one not easily or quickly cured, does not (and should not) mean the immediate demise of the pharmacy. Rather, a default needs to be addressed through a creative but realistic proposal to lenders, coupled with a request for a reasonable "standstill" period. Management must provide its solution to the lender, which must include specific operating changes, projections reflecting the impact on the business of such changes, and a timeline for implementation.

If faced with an uncooperative lender or an "unfixable" problem, a pharmacy may need to consider a chapter 11 bankruptcy filing. A pharmacy experiencing a temporary (and fixable) challenge that has caused a default under its loan agreement could hold a lender at bay, relieving the pharmacy's many immediate cash demands and providing breathing space for the turnaround.

Alternatively, for the pharmacy with insurmountable challenges and/or the need for a major balance-sheet fix, a bankruptcy filing may serve as the means to effect an ownership change and a resulting "clean slate."

Pharmacies should constantly review their financial statements to develop a continuous sense of their operational well-being. By casting an eye toward their business operations and the operations of business partners, pharmacies that have properly prepared for difficult eventualities and have not been caught unawares can find creative and appropriate solutions.

NED MILENKOVICH is a member at McDonald Hopkins, LLC, where he chairs the Drug & Pharmacy Group. He is also a member of the Illinois State Board of Pharmacy. Ned can be reached at 312-642-1480 or at nmilenkovich@mcdonaldhopkins.com