By Seb Miles
With corporates such as Lloydspharmacy divesting unprecedented numbers of outlets, enterprising pharmacy owners may be able to bag themselves a bargain. So, can entrepreneurial independents seize the opportunity to jump-start their growth and transform their future through acquisitions? And in today’s tough trading conditions, how can they secure the finance to do it?
The UK pharmacy sector is at a fork in the road. Years of reduced NHS funding, spiraling inflation, and a stagnant economy have left pharmacies struggling to absorb huge cost hikes. But independent pharmacy businesses of all sizes now have a unique opportunity to acquire discounted assets and embrace profitable new income streams, if they can find the finance to help them act quickly and confidently.
Before we explore what finance is available, let’s consider the state of the sector right now and look at how independents can turn crisis into opportunity.
Inflation has made a tough funding deal unsustainable
The current five-year pharmacy funding settlement was agreed in 2019, which now seems like a long time ago, in a very different world. Since then, community pharmacies have endured a global pandemic and the highest levels of inflation since 1981, manifesting in skyrocketing energy bills and higher labor costs, with increases in the national living wage, general wage inflation and a Brexit-induced shortage of locum pharmacists ― all while a cost-of-living crisis suppresses consumer spending.
The 2019 deal was widely considered to be tough but manageable for pharmacies. It kept the wolves (or rather the threat of further funding cuts) from the door and it was workable when inflation was low.
But as inflation has climbed higher over the last two years, the settlement has become increasingly unfit for purpose. Crucially, it agreed a flat funding rate for five years, with no mechanism to increase this with inflation. Since it was signed, inflation has rocketed from 2.1% in July 2019 to a peak of 11.1% in October 2023 ― barely budging since. The pharmacy sector has been forced to eat the difference.
Pharmacy First offers new funding and income streams
The potential of a bright new dawn for the sector appeared in May, when the government said it would invest £645 million in pharmacies to fund a common conditions scheme in England ― part of the long-awaited new national Pharmacy First service due to launch by the end of 2023, “subject to consultation.”
As we know, pharmacists are a highly skilled, comparatively untapped pool of healthcare professionals who can help fill the gap left by an NHS struggling to deliver frontline services. There is a huge opportunity for entrepreneurial pharmacies to embrace this, and boost their revenue and secure long-term growth by offering new services ― accepting there is an element of blind faith that this revenue will be economically sustainable.
Independents are in the best place to take advantage, because they know their local markets and customers and can be responsive to what they want. Arguably, pharmacies must embrace these changes or risk being left behind, as those who only focus on prescriptions will likely see their profit margins continue to drop in years to come.
The NHS seems keen to bring in automation at scale with more centralized dispensing, thus reducing the requirement for thousands of independent pharmacies. To thrive going forward, the sector will need to embrace new services and the revenue streams they promise, while industry bodies will need to be vigilant that the same don’t devalue or dilute the remuneration of the critical dispensing function.
Corporate divestments are a once-in-a-lifetime opportunity
Lloydspharmacy is putting many of its 1,300 UK pharmacies up for sale, after announcing a strategic review of its estate. Divestments are already underway and are likely to continue rapidly over the coming weeks and months.
We can also expect more sales from other corporates that spent the 2010s buying up much of the available pharmacy stock. In my experience, as margins tighten in pharmacy businesses, so does their viability for corporate operators, where an independent may be better placed to manage.
These corporate divestments offer a huge opportunity for independents ― there hasn’t been anything like it in the 15 years that I’ve worked in the sector. But it’s time-limited and competitive, so pharmacy businesses must be able to move quickly and confidently. Acquiring these assets could very much boost the growth of more agile independents that know their local market better, particularly if they also diversify beyond prescription income to embrace the consumer demand and government funding for more services direct from pharmacies.
What should buyers consider when making acquisitions?
At RxBridge, we’ve been enabling pharmacy businesses to fund acquisitions for many years, whether it’s their very first acquisition or they’re expanding an established group. As people who live and breathe the sector, we can offer a few tips based on our extensive experience.
One important conversation I often have with my clients is about assessing the true value of a potential acquisition. The sector often values a pharmacy based on its turnover, as pence in the pound of revenue. Anecdotally, this has hovered around 100 pence in the pound in England. By this rough calculation, if a pharmacy turns over £1m a year, it could be worth £1m ― but this isn’t an accurate valuation.
The business should be valued by its likely profitability, which means factoring in everything from the makeup of revenue (the dispensing mix, over-the-counter sales and services) dictating its gross margin, to the costs to be inherited, including rent and staff salaries, dictating its overheads, which the buyer has limited control over. A business with a high turnover may look fantastic at first glance, but if it’s also overstaffed and saddled with high rent and a long lease, then revenue is not the best value indicator.
Many Lloydspharmacy branches have shown a decline in prescription volume in the last few years, reflecting the tough market conditions the sector ― and particularly that company ― have been through. If an individual pharmacy asset is carrying the overheads of a larger business, this will further suppress its value. Potential buyers will also need to factor in the investment required in the business and the premises post-acquisition. However, independents, which know and understand their local market intimately, will be able to see that potential and rebuild the business better than anyone.
Why RxBridge is a natural choice for acquisition funding
RxBridge is uniquely positioned to help fund growth in the pharmacy sector, and is helping many clients leverage existing trade to fund both their next acquisition and the working capital requirement that comes off the back of it.
With years of experience in the sector, RxBridge has designed a finance facility specifically for pharmacies that’s based on the surety of the business’s revenue stream, rather than lending against the “goodwill” of the pharmacy assets themselves.
RxBridge can offer up to four times the value of current monthly income and make a fast, accurate risk assessment ― for a lending decision within a matter of days, rather than the weeks or months a bank might take.
With time-limited, competitive acquisition opportunities, businesses simply don’t have the time to spend on a long, complicated application process and then wait for a decision that, even if successful, may not align with their target completion date. Unlike a loan from a bank, RxBridge’s flexible, revolving line of credit is discretionary, has no fixed repayments, and provides the freedom to only draw down the finance needed, when it’s needed, then make repayments when the time is right.
Some acquisitions involving corporate divestments are difficult for banks to fund, because at times they are dealing with deteriorating assets, with limited trading data that are often on short leases. This makes a traditional lender reluctant to take the risk and means pharmacy businesses are instead looking carefully at funders with an established pedigree in supporting aspiring and entrepreneurial pharmacy business owners to seize their moment.
As market-leading pharmacy specialists providing revenue finance to almost 700 pharmacy businesses in the UK, that’s where RxBridge can help.