Pharmacy in the first half of 2018 has faced many challenges. Category M clawbacks, continued drug shortages and price increases have all shaved confidence off the sector.
So, how has the pharmacy premises market been affected and what’s in store for the next half of 2018?
The market is still competitive
Despite all the struggles over the past year, there remains a ‘strong appetite’ for pharmacy properties in the UK, according to Tony Evans, head of pharmacy at specialist business property adviser Christie & Co.
‘Demand for pharmacies in the first half of the year has broadly mirrored that seen in the same period for the prior year,’ says Mr Evans.
The adviser has seen a 7% increase in the number of pharmacy applicants registered on its national database in the first half of the year.
Key transactions by the firm this year include three sales over one million pounds. John Kennedy Pharmacy in Dunoon, Scotland sold for £1,450,000; Alchem Pharmacy in Gloucestershire sold for £1,800,000 and Old School Pharmacy in Bristol sold for more than the asking price at £1,300,000. The firm also sold a London pharmacy in July for over £500,000.
The firm’s director Mark Page said at the time that the London sale demonstrated ‘demand for good quality pharmacies’.
Scott Hayton, director at Hutchings Consultants, who specialise in pharmacy sales, agrees that demand is still strong. He says the market has been busy in the first half of the year, with a ‘notable increase’ in supply.
Despite this increase in properties available, sale prices have not dropped on ‘good quality pharmacies’, which he says is ‘surprising’.
‘For the very attractive pharmacies, we’ve seen very little change at all in the profile. The price is around the same and the number of offers is about the same,’ says Mr Hayton.
‘The ones with issues are the ones that have been affected,’ he continues. But the firm is still ‘finding buyers for everything’.
The properties with a few issues, such as high rent prices or overstaffing, have dropped from three to four offers two years ago, to one or two offers now. Whereas, the more attractive pharmacies are still receiving around seven or eight offers, which has remained steady over the past couple of years, according to Hutchings.
Demand is stable in Scotland and Wales
Certain areas of the UK have faired better than others over the first half of the year.
Scotland and Wales both received a boost from their respective devolved governments. In Wales, though the full funding settlement is yet to be confirmed, the government announced it would support the community pharmacy sector with £6.9 million in funding for the provision of enhanced services and a common ailments scheme.
Scottish pharmacies also received a £2.6 million funding increase, taking the total figure to £186.96 million for 2018/19.
Christie & Co says the number of community pharmacies in both regions has remained stable year on year, with low numbers of pharmacies changing hands in the areas, which Mr Evans says has continued to ‘drive premium prices’.
Within England, it’s the most accessible pharmacies that have gained the most interest, according to Mr Hayton.
‘If you’ve got something that’s down in Cornwall, your buyers are limited because you’re only dealing with people down in that neck of the woods. Everyone else has to travel four hours to get there. Whereas up the M1 is right in the centre of the country. You’ve got lots of independents, multiple operators and it’s very accessible,’ says Mr Hayton.
Independents are on top
There has also been a ‘shift in appetite’ towards smaller multiples, independent contractors and first time buyers, says Mr Evans.
Christie & Co has seen an increase in higher dispensing volume pharmacies coming to market, as well as multiples considering whether to let go of non-performing assets or the group as a whole. This trend is expected to continue into the second half of the year.
‘Pharmacies that would have previously been snapped up by the seemingly insatiable appetite of some of the larger operators are now changing hands to smaller operators and first time buyers,’ he says.
This trend is a result of the cuts and decline in pharmacy profits over the past year, he says. The clawback and tightening of the pharmacy market has led some group owners to sell off their smaller pharmacies that are less viable from a business perspective. The circumstances have also encouraged a few owners to bring the sale of their pharmacies forward and retire early, where they might have previously waited a couple of years.
‘There’s an opportunity that some astute buyers are taking, to grow your portfolio at a time when the balance of power has shifted in the market. There’s more choice for buyers and it makes it a little bit easier for them to acquire things that may be a little bit lower in price, things that are maybe of strategic interest to them,’ says Mr Hayton.
Uncertainty will decrease
Where funding cuts, category M, pricing and supply issues have put pressure on pharmacies over the past six months, there will be some relief in the latter half of the year following the Pharmaceutical Services Negotiating Committee’s (PSNC) decision to increase category M reimbursement prices by £15 million in August.
The outcome of the judicial review appeal, which returned to court in May to challenge the Department of Health and Social Care’s (DHSC) funding cuts, is also expected in the second half of 2018. Alongside this, Mr Evans hopes there will also be clarity on the 2018/19 funding settlement.
‘It is hoped that the sector can put the past months of turmoil behind itself, restoring and strengthening confidence across the sector,’ says Mr Evans.
Hutchings’ director Mr Hayton certainly thinks the price of pharmacies will remain stable, despite a predicted decrease in the number of properties available on the market.
‘There isn’t really any justification to push the prices up if you look at the profitability,’ he says. ‘We’ve had an increase in supply and the price hasn’t gone down, so I would say prices will probably stay where they are currently because the shortage of supply won’t necessarily outweigh the impact on profitability.’