It will have been worrying to the consumer to see such headlines, yet from our recent experience these are real issues that the retail pharmacy sector has been facing for some time. 

In the last 12 months alone FRP Advisory has been mandated in a series of pre-lend review mandates, M&A support roles and restructuring engagements. Unfortunately, our skills have also been needed on several Administration appointments including E-Nova Healthcare Limited Medipharmacy Limited and Northcare Group where through our collaboration with the pharmacy specialists Christie&Co, we have been able to secure disposals of all the sites protecting jobs and consumer access to critical help, and of course creditors’ interests.

But what is causing these difficulties?  Surely the services that pharmacies provide and the demand for them has increased, having been central to healthcare delivery during the Covid pandemic (yes, it wasn’t actually that long ago…)?

Here is a snapshot of some of the key issues that continue to blight the sector:

• Central Government funding - over recent years, funding for community pharmacies has been cut in real terms by about 30% under the 5-year framework agreed in 2019, contributing to a funding shortfall of approximately £1.1 billion. 
  
  This financial squeeze has coincided with rising operational costs and severe staff shortages, which have forced many pharmacies to close. The funding framework has not yet been re-set beyond the short-term creating uncertainty for operators and their lenders.
   
• Demand on the network - With increasing patient demands and a well-intentioned push to divert assessment and treatment from GPs to pharmacies (the Pharmacy First initiative), the longer-term financial benefits to pharmacy operators have yet to be proven and some remain sceptical. This additional pressure on the system comes ironically at a time where there are now just over 11,000 community pharmacies in England, the lowest number since 2015

It is estimated that more than one in ten pharmacies have been lost in the poorest 20% UK regions in the last six years.  This will have been exacerbated by the 2023 withdrawal of Lloyds Pharmacy from 237 Sainsburys stores), which typically offered easy access to patients, and also the June 2023 announcement by Boots that 300 stores will be permanently shut with the risk of more to follow suit.

• Costs and supply of medicines – 97% of pharmacy owners have reported significant increases in wholesaler and medicine supply issues, which causes delays in dispensing medications and potentially putting lives at risk 

Pharmaceutical and medicine suppliers is a small community, dominated by players such as Alliance,  Phoenix and AAH.  Suppliers are in the enviable position that they can unilaterally set price structures whilst retailers are beholden to delivery scheduling and a tightly controlled, and dare we say it restricted, static income framework.

Readers will also be aware of the reported sale process for AAH, and speculation of private equity interest from the likes of HIG and CapVest.  The introduction of private equity into the supply chain is perhaps unsurprising but is highly unlikely to alleviate the issues faced by retailers.

• Labour and skills supply – Pharmacies are also dealing with substantial increases in workload even before the push to divert patients unable to access GP services to turn to pharmacies for help with minor ailments. This will inevitably lead to a significant rise in patient requests, exacerbating the pressure on pharmacy staff. In fact, 92% of pharmacy staff report a significant increase in workload, with 81% admitting they are struggling to cope

Such pressures come at a time where there has been a substantial exodus of clinical pharmacists from the UK to GP surgeries who benefit from being able to claim reimbursement of salaries from the “Additional Roles Reimbursement Scheme”.  

All of this leads to the unsurprising consequential impact on average hourly locum rates which increased by 85% during 2020-23, higher sometimes for remote locations and Superintendents, and sits alongside the April 2024 annual rise in the National Living Wage (£11.44, a 10% increase in cash terms on 2023). 

• Patient reactions – With all these issues, it is understandable that patients become frustrated and sadly has even led to aggression towards pharmacy staff​ (there are even reports of stones being thrown at pharmacists).  This has led to increased security costs (such as barriers and personnel) but has also led to some store closures.
• Artificial Intelligence (“AI”) – It is easy to see the potential benefits that AI could bring to the retail pharmacy sector – the way medications are dispensed, improving patient care, and enhancing operational efficiency. However, as with any technological based evolution, there will be early adopters and laggards. Where any institution lies in this range will depend on many things including cost/benefit analysis, and scalability and openness to learn 

All of these points are focussed on the macro-economic factors effecting pharmacy operators.  However, in our experience there are also many examples of self-inflicted problems such as revenue and stock management (especially those operators with wholesale and/or hub-and-spoke operations), cash flow and financial forecasting, lifestyle business mentality and under-capitalisation.

It’s clear that the combination of long-term structural issues and self-inflicted problems are not going away in the near future regardless of a new Government and its policies which are of course holistic and fledging this early into their tenure.

Although the sector is challenging, there are profitable and cash generative pharmacy groups. With proposed changes to hub and spoke dispensing changes to allow dispensing across different legal entities from 2025 there are opportunities for larger pharmacies to improve utilisation of hubs by servicing smaller operators and likewise smaller operators outsourcing supply.

Whether looking at new investment/financing opportunities or dealing with stress and distress in existing exposures, the highly regulated retail pharmacy sector has nuances that to the uninitiated can be a steep learning curve.