John Tyas, Associate at Vickery Holman property consultants, reviews the state of the pharmacy market:
In 2023, despite ongoing geopolitical turbulence, the UK government’s internal instability from the previous year eased, allowing attention to shift back to critical matters. Challenges persisted in the pharmacy sector due to funding issues and other pressures. The Bank of England’s efforts to curb rising living costs through inflation and interest rate adjustments further complicated the landscape.
During the first six months of 2023, the UK pharmacy sales market experienced unprecedented activity. Parent company Hallo Healthcare Group’s decision to divest its portfolio of over 1,054 Lloyds Pharmacies flooded the market with business opportunities. Independent sellers felt the impact as potential buyers focused on the divestment. However, as the year progressed, buyers shifted their attention to acquiring established, high-performing independent pharmacies.
Other pharmacy chains like Boots and Well also divested some branches, albeit on a smaller scale than Lloyds. With Lloyds’ disposals completed, sales volumes are gradually stabilizing. Buyer activity surged, with new registrations increasing by 91% compared to the previous year. First-time buyers led the way, followed by existing owners and investors.
Meanwhile, first-time buyers primarily acquired independent pharmacies. Despite an oversupply of pharmacies for sale, buyers differentiated between well-established independents and riskier options.
The oversupply of pharmacies for sale in 2023 led to downward pressure on average goodwill values. However, buyers differentiated between established independent pharmacies and riskier corporate offerings, resulting in higher goodwill values for independents. Scottish pharmacies continued to achieve higher prices than those in England and Wales, although many sales were agreed upon towards the end of 2022.
Profit Margins
Average gross profit margins, which varied historically based on factors like location, buying power, and business strategy, faced significant pressure in 2023. Despite increased dispensing activity and turnover, profit margins were squeezed due to drug reimbursement pressures and supply chain issues. The average UK gross profit margin in 2022 was 33.5%, but reductions of 2-4% were common in 2023. Contractors increasingly relied on implementing services to support profits amid rising costs and reduced income from dispensing activities.
Employment challenges
Wage Growth and Staff Attrition: Recent reports indicate that UK wages grew at a record pace of 7.8% annually up to June 2023. However, the pharmacy sector grapples with employment issues. The National Living Wage increased to £10.42 in April 2023, and pharmacists and qualified staff are leaving for GP surgery and PCN roles under the Additional Roles Reimbursement Scheme. This migration has led to inequality within primary care.
Lack of Support: Despite the government’s pledge to recruit 26,000 new staff into general practice by 2024, the pharmacy sector faces an employment crisis. Figures show that many pharmacists and pharmacy technicians have taken up roles under the reimbursement scheme, but it hasn’t alleviated the workforce pressures.
Locum Rates: While some contractors experienced respite in locum costs in the first half of 2023, workforce pressures persist. Locum rates increased across most UK regions, except for Scotland. On average, locum rates rose by 3.5%, with winners (like Cardiff) and losers (like Inverness).
Key Dispensing & Services Activity
Dispensing Activity Increase: In England, dispensing activity increased by 4% during this period. For instance, in March 2023, contractors declared 97,216,400 items, approximately 3.8 million more than the same month in the previous year.
Community Pharmacies: The average volume dispensed by community pharmacies rose to 8,078 items per month. Standard pharmacy settings led the way with a 5% increase.
Other Settings: Health centre adjacent settings saw a 4.7% increase, while health centre pharmacies had the smallest increase at 2.4% (compared to community settings). Integrated settings maintained the highest average volume (10,030 items), followed by health centre adjacent settings (9,354 items) and standard settings (7,529 items).
Operator Types: Independent contractors experienced the highest volume increases, averaging 8,949 items per month. Corporate operators had the smallest increase at 1.4%.
Contract Types: Standard hours contracts averaged 7,837 items, 100-hour contracts dispensed an average of 8,972 items, and distance selling contracts (distorted by online pharmacies) averaged 14,419 items (excluding the top seven online pharmacies, the average volume falls to 7,228 items).
Market Predictions
Community Pharmacy England’s recent estimate suggests that the current Cat M clawback could reduce the average item payment by 14p. However, the Pharmacy First Scheme launch in England, injecting £645 million over two years, offers a financial boost. In Wales, a 5% funding increase for 2023/24 is another positive development. These measures are expected to renew buyer confidence as we move into 2024.
A potential reduction in interest rates by the Bank of England, prompted by lower CPI inflation figures, could alleviate financial pressures on operators and assist buyers with affordability. The Community Pharmacy Contractual Framework negotiations in 2024 present a significant opportunity for the sector to secure a vital uplift to the contract’s fixed global sum.
Both independent group operators and corporate owners are likely to continue reassessing their portfolios, leading to high transaction volumes. A general election in the autumn could also bring favourable outcomes for the pharmacy sector.
Overall, pharmacy goodwill prices are expected to remain consistent in 2024 unless there is a significant drop in the supply of pharmacies on the market or a substantial increase in community pharmacy funding.
Vickery Holman have a specialist healthcare team with expertise in valuation, leases, rents reviews, business rates, acquisition and disposal, development and building surveying.
