Pharmacy multiples offloading a ‘significant volume’ of pharmacies in certain areas represents an opportunity for independent contractors who can be more responsive to local needs, the commercial broker Christie & Co. has said.

But purchasing an underperforming pharmacy can be challenging, particularly for first time buyers, Christie & Co.’s head of pharmacy, Tony Evans has warned.

The report, published today, said that recently ‘a number of corporate operators have implemented disposal strategies, offloading significant volumes of pharmacies in certain areas. Inevitably, this additional supply of pharmacies to the marketplace will lead to a perception of more choice for purchasers.’

However, it added that ‘the sale conditions and liabilities that may accompany some such sales will mean that those prospective purchasers who are either new to the market or are reliant on funding to support acquisitions may find acquiring such opportunities challenging. Whilst many operators are feeling the squeeze, the increased supply of pharmacies in the market creates a strong opportunity for acquisitive, experienced operators with good track records and funding support.’

Mr Evans told The Pharmacist that ‘larger independent operators who have got wider support from their existing businesses’ might find it easier to take these pharmacies on.

However, he said that for first time buyers the process might prove more challenging.

‘If you look at some of the corporate disposals, inevitably you are selling or looking to dispose of pharmacies where the lease terms are quite short, and may need new leases being negotiated or reverse returns being negotiated. And that can be quite challenging’, he said.

He also said that larger operators looking to divest of branches would want to do so very quickly, which might favour experienced operators who already have fitness to practice for an existing business, rather than a first-time buyer who would have to go through a lengthy referencing process.

‘So, in essence, what you'll find is that those corporate operators will look at those buyers. And if they have other existing operators or multiples, who are also interested, they probably go with a comfort confidence that those people can deliver over and above the first time or smaller independents,’ he said.

According to the Christie & Co Business Outlook Report 2023, 80% of those expressing an interest in acquiring a pharmacy business through Christie & Co over the last year were first-time buyers, but just 23% of sales undertaken by Christie & Co in 2022 were to first-time buyers.

Mr Evans said that it was ‘really important’ for first-time buyers to be clear about their funding capabilities, and to ‘do their homework’ in engaging with business intermediaries.

‘It's talking to a solicitor, trying to understand the purchase or sale structures that there are for pharmacies, whether it's a share sale or an asset sale; it's talking to the accountant in terms of KPIs for pharmacy, understanding gross profit margins, and what wage costs should be etc. And also getting the opportunity and working with an accountant on a business plan.’

He said that banks had become ‘more discerning’ over the last year due to high interest rates making borrowing more expensive. ‘They're going to want to know that people can afford to borrow and they've got affordability and serviceability in the deal that they're doing,’ he said.

However, he said that there was an opportunity for independent contractors, whether first-time buyers or not, to make a success of a business which may not have been as profitable under a multiple.

‘[even though] these opportunities don't necessarily work in a corporate setting doesn't mean that they won't work in a in an independent setting,’ he said.

He said that since clinical services were highlighted in the Community Pharmacy Contractual Framework (CPCF), ‘the banks are very much aware’ that community pharmacy’s income would be increasingly directed towards clinical services, and that it would be ‘short-sighted’ for a business plan not to include additional services.

‘It is important to actually embrace as many of the new services that are out there to grab as much more income as you can,’ he said, adding that locally commissioned services might also provide an additional income stream.

‘That’s where I think some of these smaller independent buyers are well placed to understand that local market and react more quickly than some of the larger players could do,’ he said.

‘One that seemed to get a lot of traction last year was the earwax removal services. A lot of pharmacies have taken that on and there's been a real requirement for that in some areas, there’s been plenty of activity on that for what is a relatively small investment.

‘What a pharmacy operator needs to do is it needs to attract its patients. If you're offering services that the patient wants, that patient is going to stick with you.

‘Services have got to be a sure-fire way of actually increasing footfall into your pharmacy. So, if you're delivering more services, you're probably going to be delivering more dispensing activity as well,’ he said.

He said that with funding challenges facing the pharmacy sector, ‘people are more cautious in in the way they're looking at the market’, ‘that's not saying that they're not buying’ – last year, Christie & Co sales in terms of deals agreed were up by 12.5%.

‘So it shows that there's still a good appetite in the marketplace’, but buyers would be assessing new  opportunities in terms of the potential impact on their own business.

He said that multiples’ decisions to sell branches were made on a case-by-case financial basis, but that a shortage of full-time pharmacists to act as responsible pharmacists for a branch were a key factor.

The Christie & Co report said that ‘Employment issues remain as we continue to see pharmacists drain away from community pharmacy into positions within PCNs and GP environments under the Additional Roles Reimbursement Scheme (ARRS). The squeezed supply of full-time pharmacists has led to a rapid increase in locum costs, as contractors seek to deliver a consistent service, however, such outgoings are unsustainable in the medium to long-term.’

He also said that ‘pharmacy contractors are under pressure. There needs to be recognition of that. All the things we've talked about in the report, and the general cost pressures: the drug shortages, supply, concession list being the highest they've been for many years, all those things impact the day-to-day trading and running of those businesses, so there's got to be recognition.’

‘Admittedly, other sectors are facing pressures as well. But this is a very important services you do with the health of the nation. It is the primary care service that actually feeds into those other things. So, if pharmacy is challenged, and starts to have real issues, that is going to have a knock-on effect, on all the other primary care services as well. You'd hope that something will give at some stage and when it does, I think people will recognise that and the market continues.’

‘We see 2023 as a strong year is it started off very busy in terms of both instructions to market but also appetite for those instructions. I think we hope to see a mirror of what we saw in 2022.’

‘We're still doing deals at the moment. We're still selling pharmacies at the moment. That suggests that people still see opportunity there. But obviously, the funding does need looking at so people are going to be looking at that and looking at what the negotiation is doing from that point in making sure that community pharmacy has a healthy future.’