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The boomer rush to retire means major expansion opportunities for this small-town pharmacy chain

The Globe and Mail

When Chris Gardner left his corporate job three years ago to run a small, fast-growing pharmacy chain, he figured he’d need to adapt to a more entrepreneurial, hands-on way of working. But installing plexiglass panels on store counters? He didn’t foresee that being part of the boss’s role. Yet on March 24, the CEO of Rx Drug Mart was filling in as a deliveryman, handyman and doorman in a frantic effort to keep the company’s pharmacies open, and staff safe, as scared people flooded the stores.

Days earlier, the Ontario government, along with much of Canada, had imposed a lockdown on all retailers, except those providing essential services—including pharmacies. “Everybody is being told to go home, but pharmacists are mandated to come to work, and sick people are coming to see them,” says Gardner. In rural communities, where many of Rx’s stores are located, the pharmacist is sometimes the closest thing to a medical professional. If any of them were to get infected, residents would lose access to health care. So, when a truck loaded with three pallets of protective shields arrived at Rx’s Toronto headquarters, everyone from payroll clerks and sales staff to the CEO himself piled what they could into their cars and fanned out throughout the province. “It was divide and conquer,” says Gardner.

While the pandemic has demonstrated both the health care system’s shortcomings and its resilience, it has also highlighted the essential function of ancillary services such as pharmacies—among the first places people went when doctor’s offices shut down. Some of the response measures added to pharmacy burdens. To prevent medication shortages, governments limited prescriptions to 30 days' supply, down from 90, tripling the volume of refill work. Paperwork ballooned even as fees dwindled, partly due to caps on dispensing fees and partly because people avoided visiting doctors for all but the most urgent issues. Compounding the challenge were staff shortages: Out of Rx’s 1,000 employees, 100 were out the first week because they were in high-risk groups, quarantined upon returning from March break holidays or forced to take stress leave.

Gardner himself hasn’t had a day off since mid-March because, while COVID-19 has been an unprecedented challenge for his company, it also presents a big opportunity. Rx may have been born from the idea that the large corporate entities driving the drugstore business were operating in their own best interests rather than those of patients or the community. But it’s also a consolidation play in a highly competitive marketplace. Within five years, Rx has emerged as the third-largest national chain (excluding Quebec)—a three-year growth rate of nearly 14,000% that puts it at No. 1 on this year’s list of Canada’s Top Growing Companies. With the September acquisition of a chain of 35 pharmacies in Western Canada, Rx will have more then 130 locations across the country, bested only by Shoppers Drug Mart (owned by Loblaw, with more than 1,300 stores) and Rexall (part of Texas-based McKesson Corp., with roughly 400).

Its main competitor is Saskatchewan-based Rubicon Pharmacies, and the two companies have much in common. Both are owned by private equity firms. Both focus on small-market stores out of the crosshairs of the corporate behemoths. And both are capitalizing on the accelerating trend of baby-boomer business owners looking to retire. Stuart Elman, managing partner of Persistence Capital Partners, the health-care-focused private equity firm that owns Rx, says that of the nearly 11,000 retail pharmacies in Canada, close to 60% are independent. “It’s a highly fragmented market, the trends are driving demand, it’s a recession-resistant industry, and aging has increased the focus on health and wellness.”

The aging trend is particularly pronounced in rural Canada. As access to health care there diminishes, the pharmacist’s role grows more important. But the added work, risk and stress brought on by the pandemic will likely lead many independent owners to look for an exit. Both Rx and Rubicon want to be their first call.

The consolidation of the pharmacy sector started more than a decade ago, largely driven by major players' expansion campaigns, but with smaller chains and investor groups jumping into the fray. Brian Dawson, former vice-president of acquisitions at Rexall, launched Rx Drug Mart in 2015 with seed money from Persistence and an eye to merging family-owned businesses into a network with greater efficiencies.

Today, depending on who you ask, there are between a dozen and almost 30 players looking to consolidate independent drugstores, most of them regionally focused. In 2017, two clear leaders emerged. That June, Rx won a highly competitive sale of 27 Rexall pharmacies, which the Competition Bureau forced McKesson Canada to divest as part of its US$2.1-billion acquisition of the chain. Then, in September 2017, private equity firm TorQuest Partners acquired Amenity Holdings, operator of 32 pharmacies in Western Canada, and seven months later merged it with Rubicon, another Western chain founded by a group of pharmacists in 2005. As a result, Rubicon and Rx became No. 3 and No. 4, respectively, in the Canadian pharmacy sector. The ascent of PE-backed buyers is due to the constraints that family-owned chains face around management expertise and capital, says TorQuest partner Daniel Sonshine. “At some point, they can only go so fast from an acquisition perspective. The banks are pretty good in providing debt, but there’s an equity requirement.”

With a network of 42 locations, Rx now needed not only M&A know-how but integration and operations chops. Elman asked around, and Gardner’s name kept popping up. He was running Shoppers' national operations when he got the call. His answer? “No thanks—I did that 20 years ago.”

Gardner had spent his entire career at Shoppers, during which the company tripled its store network. Originally from Newfoundland, he started as a store manager while still in university, fully intending to eventually “get a real job.” But he kept advancing, first to managing multiple stores in Alberta, then overseeing regional operations after Shoppers bought Northern Drugs in 2005. His rise took him through merchandising, IT and eventually overseeing the countrywide store network. He had bright prospects at Shoppers' new parent company, Loblaw; its president, Sarah Davis, mentored him in biweekly coaching sessions. “But in the back of my mind I knew that if I stayed another five years, I’d be a lifer,” he says. “I was young enough to make a move, and if it didn’t work out, I’d recover.” Plus, after its merger with Loblaw, Shoppers' growth slowed as it focused on synergies. “I knew there were a lot of markets Shoppers was not pursuing because they were too small for its one-size-fits-all footprint,” he says.

He joined Rx as VP of national operations in 2017, becoming CEO two years later (Rx’s parting with founding CEO Dawson was not amicable, says Gardner). He overhauled the management team, poaching experienced executives from Shoppers and Rexall. But the biggest part of his job was courting pharmacy owners. “For all the stores we’re buying, this is someone’s baby,” says Elman. “It’s the single biggest transaction they’re likely to do, so we need to assure them their business is in good hands.” With lengthy experience dealing with Shoppers franchisees, Gardner has the everyman touch the task calls for. “You can tell Chris is very smart and experienced, but he’s also authentic and down-to-earth—none of that ‘Ooh, I’m CEO’ arrogance,” says Michael Forbes, who sold eight pharmacies to Rx two years ago. “It’s like going on a date: If they’re rude to the waiter, that’s not cool.”

By the late 2010s, the feverish consolidation pace slowed. “You don’t see buyers overpaying for businesses,” says an industry insider who asked not to be named. “Some conservatism has entered as consolidators have reflected on the risk in the industry.” With up to 80% of small pharmacies' revenues coming from prescriptions covered by third-party payers, a drugstore in essence has a handful of large customers that have a lot of power. In addition, the pan-Canadian Pharmaceutical Alliance, established by federal and provincial governments to regulate drug pricing, brought in 25% to 40% reductions in the cost of most prescribed drugs two years ago, a change that hit revenue and profits hard, and reignited consolidation.

But while some pharmacy owners may be ready to sell, the price is often not their top priority. “There are a lot of legacy factors, especially for pharmacies that have been part of multigenerational ownership structures,” says Max Beairsto, a former pharmacist and director with Katz Group (former owner of Rexall). He now brokers sales of businesses, particularly in health care, and has handled deals involving Rx. “What makes them unique is they offer the store a level of autonomy others wouldn’t,” he says. “They also let the previous owner stay on and transition the business.”

Gardner says many owners worry that if they sell to Shoppers or Rexall, “their people will get fired and the name will change.” They have good reason: The two giants sometimes buy stores, only to shut them down and roll the prescription business over to existing locations—a tactic known as “close and roll.” The relentless focus on productivity can also affect patient care. The average Shoppers store handles about 500 prescriptions a day, says Gardner, compared to 200 at an Rx-owned pharmacy. “When you’re doing that type of volume, you can’t focus on the patient as much.”

Finding a friendly buyer that commits to maintaining the community connection is therefore an appealing proposition. When Lovell Drugs, a small pharmacy chain in eastern Ontario, looked to sell, Arthur and Diana Lovell, the third generation to run the business, were anxious to find a company that would “respect our values,” Diana says. They settled on Rx. In a video announcing the change, the couple, dressed all in white, look like they’re eulogizing the death of a loved one as they leaf through albums of customers and community activities while a photo of the founder looks down from the wall. Gardner assured the family their name would stay not only on the storefronts but on the paycheques, the uniforms and the website. “We pride ourselves on not being a cookie-cutter pharmacy chain,” he says. “Our definition of success is that when we buy a store, patients or staff see no change. If it was Bob’s Drugs, it will stay Bob’s Drugs.”

Rx looks for stores that have been in communities for decades, not years. While it tends to focus on small markets, it’s not a firm rule. Occasionally, an acquisition will include urban stores, and some of Rx’s locations are affiliated with or housed inside medical clinics, hospitals or grocery stores. “When you can partner with a clinic, you can open that store at a very low cost, take advantage of office synergies and be cash-flow positive within a year,” says Gardner.

To capture those synergies, he oversaw the development of a cloud-based system that integrates with finance, payroll and point-of-sale platforms, and allows management to track sales and prescription counts hour by hour. This is particularly important for monitoring far-flung locations, such as a pharmacy in Inuvik or the one on Fogo Island, off Newfoundland. By integrating more functions and spreading costs across a growing network, the operating costs per store drop: What used to be 8% of sales before Gardner started is down to 3%. “We try to find stores where the value of us owning it versus an independent is higher,” he says.

Fans of Alice Munro will recognize Wingham as the quintessential small town. A community of about 3,000 on the edge of Ontario’s Mennonite country, it has three schools, two grocery stores and a small museum about Huron County with a library garden dedicated to its most famous native. “This is our wheelhouse,” says Gardner, standing at the entrance of an IDA on the edge of town.

This drugstore was part of Rx’s 2017 Rexall acquisition. Since retaining the name wasn’t an option, the company put it under the IDA banner—one of several programs that supply independent owners with merchandising, private label lines and other support.

Clad in a crisp white shirt, navy dress pants and a forest-green cloth mask, Gardner steers a tour of the roughly 5,000-sq.-foot store—one of Rx’s largest. He is short and fit, with the amiable manner of the small-town business owners with whom he regularly interacts. Since taking over this location, Rx has added a Hallmark “store within a store” offering cards and knick-knacks, and so-called “programs” of curated selections, including clothes, sunglasses and jewellery. “In smaller communities, we tend to be like the general store,” he says as we pass a passport photo booth and an ATM, and every “front store” has a different product mix. “A store that serves a dozen Indigenous reserves in northern Ontario will have very different needs than one in Ajax.”

Aside from its size, the Wingham IDA is distinctive in being the first Rx pharmacy to house a virtual health clinic. While many stores offer telehealth apps that refer people to physicians, this location is staffed by a part-time health care professional who assesses patients, logs their information and, when warranted, connects them with a doctor via video. A partnership with Appletree Medical Group, which provides the technology, the equipment and the physician’s assistant (typically a foreign-trained doctor in the process of getting licensed in Canada), the clinic also offers on-site pregnancy, blood sugar and other basic tests.

In the wake of the pandemic, this is a natural area for expansion. Most Rx pharmacies already provide flu vaccines, and Gardner hopes they’ll one day play an important role in COVID-19 vaccinations. “When we acquire a store, we train the pharmacy teams on the best practices from our other locations to expand their scope of practice,” he says. How far that scope can expand varies province to province. In Ontario, for example, pharmacists may soon be able to diagnose minor ailments such as pink eye or urinary tract infections. In Alberta, they already have broad prescribing authority, and can request lab work or initiate therapy.

But introducing such services is expensive and time-consuming. “As an individual operator, it’s almost impossible to do some of the new things the big guys are doing,” says TorQuest’s Sonshine. To compete with the corporate chains, Rubicon, for example, plans to implement “central fill,” whereby prescriptions are filled offsite and sent to the store ready for customer pick-up. It’s also introducing technology that facilitates medication reviews and synchronization. But with generic drug prices down about 60% in the past 15 years and wage costs rising, most independent pharmacists lack the resources to stay abreast of change. Forbes, for one, sold his business after growing disenchanted with dwindling margins and tangled bureaucracy. “It’s not as entrepreneurial. It’s totally riddled in red tape, and as a pharmacist, you’re almost just a clerk processing receipts.”

COVID-19 may be the last straw for many older owners who’ve been holding out. Being elderly puts them in a high-risk group; do they really want to be frontline workers if a second wave hits? While that’s a grim prospect, it does have a silver lining for Rx. It has already registered a significant uptick in inbound calls from pharmacists wishing to explore a sale. “COVID has shown how much of an essential service a pharmacy is,” says Elman. “There are not a lot of businesses that can say that. The importance of pharmacy as key health care resource is here to stay.”

Additionally, the pandemic may usher in a trend favourable to Rx: a reversal of the urbanization that emptied out small communities. With people working remotely, more may return to the towns they left or move to the countryside. Gardner notes that the pharmacy industry’s consolidation in Canada is 10 years behind the U.S., where “the small-town community pharmacy has effectively disappeared.” The story in Canada may prove to be different. Rx—which dubs itself “the pharmacy preservation society”— hopes that by making independent drugstores more profitable, they’ll remain a Main Street fixture, says Gardner. “We may see a re-emergence of community pharmacy.”