Funding pressures risk turning pharmacies into ‘zombie firms’

The cost pressures facing independent pharmacies risks turning them into ‘zombie firms’ that cover day-to-day costs but do not generate profit, a new report has warned.

The report by Edge Health, sponsored by Sandoz, found that community pharmacies face growing operational and financial pressures which threaten the long-term sustainability of the sector.

But due to the high exit costs that ‘may exceed the business’s residual value’ – such as redundancies, lease commitments, and loss of pension-supporting assets – it can be difficult for pharmacies to close down, the report said.

It added: ‘This situation may result in the continued operation of "zombie" firms: businesses that cover variable costs but do not generate economic profit.

‘In economic terms, this amounts to an unpriced subsidy from pharmacists to the NHS.’

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The report also noted that ‘stagnating’ Pharmacy First income was forcing pharmacies to provide significantly more consultations to deliver additional revenue.

It cites NHS Business Services Authority (NHSBSA) data which shows that the scale of Pharmacy First has grown rapidly, with total consultations increasing from 125,275 in February 2024 to 254,692 in June 2024.

But the report highlights a ‘noticeable drop’ in average monthly income from Pharmacy First in August 2024, reflecting the threshold pharmacies must meet to receive the monthly fixed payment increasing to a minimum of 20.

The report said: ‘The funding model appears to increase the workload on already-strained pharmacies without providing a proportional or stable income.’

It also warned that pharmacies remain ‘almost entirely dependent’ on dispensing for their financial stability, at a time when the medicine supply chain is increasingly volatile.

The Department of Health and Social Care (DHSC) imposes a £900 million cap on how much profit can be generated by the entire pharmacy sector, which incentivises pharmacies to find the cheapest wholesaler to maximise the difference between purchase and NHS reimbursement price, the report said.

‘But the marginal benefit of securing cheaper stock is largely eroded once DHSC adjusts the national price baseline,’ it added, referring to the way the NHS medicine reimbursement price is lowered if pharmacies are able to procure a drug more cheaply.

‘Pharmacy managers may spend considerable time comparing prices for small unit savings, and many pharmacies purchase from multiple wholesalers to capture small discounts.

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‘This generates additional delivery traffic, logistical complexity, and environmental impact. The total search and transaction cost may exceed the value of the savings achieved.’

The report said that this ‘downward pressure’ on reimbursement following any decrease in wholesale prices makes the UK a less attractive place for drug companies to invest compared to other countries, which in turn contributes to medicine shortages and erodes supply chain resilience.

According to the Company Chemists’ Association (CCA), the retained margin would need to rise to £1.28 billion to keep pace with inflation and the increasing volume of dispensing since 2014/15.

Community Pharmacy England (CPE) chief executive Janet Morrison said the report was more evidence of the ‘extraordinary pressures’ that community pharmacies are facing, and underlined the ‘critical’ need for government to stabilise the supply chain.

She added: ‘It backs up what our sector polls tell us about the time pharmacy teams have to spend sourcing medicines, as well as showing the breadth of the problems that volatility in the supply chain and margin are causing.

‘We share the report authors’ concerns about the long-term viability of community pharmacies, and their calls for economic reform to address the financial instability in the sector.

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‘This report is yet more confirmation that community pharmacy is on a knife edge: pharmacies urgently need investment and a roadmap for the future.’

The report makes several recommendations to support financial stability and improve system functioning, including:

• Shortening the time between price concession decisions and reimbursement adjustments;
• Introducing a transparent mechanism linking the retained margin to cost pressures so its value could be periodically reviewed and adjusted;
• Continuing to expand Pharmacy First to include a wider list of eligible conditions, or simplifying consultation and referral thresholds; and
• Considering mitigations for pharmacies facing worsening financial circumstances.