Despite increased services and dispensing activity, cost pressures continue, says Christie & Co in Pharmacy Market Review

MARKET COMPOSITION

In the year to 31 March 2024, the UK pharmacy market saw a decline of 3.5 per cent, with 505 pharmacies removed from the register, taking the total number of pharmacies across England, Scotland, Wales and Northern Ireland to 13,822.

Most of these 505 closures came from within corporate estates. Following divestment programmes which ran throughout 2023, Rowlands saw a decrease in its estate of 15.8 per cent whilst Boots saw a decrease of 13.2 per cent. All three supermarket chains – Tesco, Asda, and Morrisons – also saw minor reductions in the number of pharmacies they operated. In contrast, Well Pharmacy saw an increase in the number of branches it operated, increasing by 3.8 per cent to 761 pharmacies due to the company’s acquisition of 42 pharmacies in the Norchem Group.

The most significant impact on corporate market share was the complete loss of the LloydsPharmacy brand from the high street as its owner, AURELIUS, completed its national divestment programme and exited the sector. Effectively, in its two-year tenure of LloydsPharmacy, AURELIUS oversaw the loss of 1,349 corporate pharmacy branches from the high street. Without a doubt, the main beneficiary of this demise has been the independent sector, with existing operators and first-time buyers snapping up opportunities to acquire pharmacies at greatly discounted prices.

SUPPLY & DEMAND

Data for the first six months of 2024 suggests that, of 95 completions that took place through Christie & Co in the first half of 2024, 22 per cent of sales were to first-time buyers, 13 per cent were to independent contractors, 22 per cent were to small independents, 13 per cent were to regional multiples and 30 per cent were to large group operators. This reflects the ongoing preference to accept offers from existing operators, or those with Fitness to Practice in the same ICB area.

In the first half of 2024, of the sales completed, 92.5 per cent were asset sales. The reason for this is the increased volume of corporate or group operator sales. As these corporate disposal programmes subside over the remainder of 2024, it is anticipated that this will settle, with more share sales set to conclude. The average time an asset sale has taken to complete has improved compared with 2023 timelines, now down to 31 weeks. Whilst share sales have been relatively few so far in 2024, they have, on average, transacted in 33 weeks, a slight improvement on 2023 timelines.

OPERATIONAL REVIEW

Despite seeing increased turnover through additional activities, remuneration under the 5-year deal was unable to offset the increased cost pressures the sector has experienced. Analysis of Christie & Co’s transactional and valuation data for the last 12 months underpins this, with the average combined gross margins falling by 1.7 per cent to 31.9 per cent. Whilst this shows an overall decline, it also masks a more significant issue in dispensing gross margins where, anecdotally, many operators have spoken of margin declines of between 5 per cent and 7 per cent. Had it not been for the increased service offerings they had generated, the overall margins would have declined further.

Price concessions continue to challenge the sector. In April 2024, the Department for Health and Social Care imposed changes to its approach to concession pricing, both untested and without consultation. Community Pharmacy England strongly opposed the changes and continues to warn that putting further pressure on pharmacies to dispense at a loss will have profound consequences for the sector, patients, and the primary care system.

EMPLOYMENT CHALLENGES

Employment cost pressures remain one of the key issues impacting pharmacy businesses. With the increase in the National Living Wage in April 2024 of 9.8 per cent, this is expected to continue over the remainder of the financial year.

The latest statistics released through the National Workforce Reporting Service’s Primary Care Network Report show that, from 31 March 2020 to 31 May 2024, a total of 6,694 Pharmacists or Advanced Pharmacists, as well as 2,180 Pharmacy Technicians or Trainee Pharmacy Technicians, have been lured away to roles within GP practices or Primary Care Networks under the Additional Roles Reimbursement Scheme.

Whilst this continued to impact the availability of Pharmacists across the sector, data released by Locate a Locum suggested that average locum rates decreased across all four country regions ranging from a 6.7 per cent reduction in England to a 13.2 per cent reduction in Scotland. With a combined UK average of a 9.9 per cent reduction, it is hoped that this will provide some respite to the employment challenges the sector has seen. By city, the lowest recorded locum hourly rates were seen in Wolverhampton at an average of £24.84 per hour whilst the highest were reported in Inverness at an average rate of £46.62 per hour reflecting its locational remoteness.

KEY DISPENSING & SERVICES ACTIVITY

In the 12 months to March 2024, dispensing activity across England increased by 8 per cent. This contributed to the year-on-year trend increase in the combined average dispensed by community pharmacies to 8,565 items per month.

Analysis by contract type showed that the average dispensing volume for a standard hours contract increased by 6 per cent to 7,834 in 2024, whilst 100-hour contracts increased by 10 per cent to 9,870 items. Distance-selling contracts saw the most significant increase which, even when excluding the top seven online pharmacy platforms, saw a 20 per cent rise to 8,661 items per month.

Service activity has become increasingly more relevant to a pharmacy’s overall activity, none more topical than this year’s rollout of the Pharmacy First Scheme in England. Whilst a proven service in Scotland that has been developed further, in England the scheme remains in its infancy, despite promises of additional conditions to be captured by the service. Additionally, 9,261 pharmacies in England undertook an average of 336,525 New Medicines Services per month, equating to an annual total of 4,038,300.

ONLINE PHARMACY

Online pharmacy has continued to attract attention over the last 12 months, most notably regarding the merger of LloydsDirect and Pharmacy2U that was first announced in the autumn of 2023.

When tracking the movement in dispensing volumes for the top seven online pharmacies, Christie & Co noted a continued increase in dispensing volumes which were up 11 per cent in the 12 months to the end of March 2024, with a total of 36,108,103 dispensed items. Although the principal activity continues to be dispensing, some online pharmacies have looked to clinical services to offset cost pressures. Added to this is the ability for online pharmacies to provide advice under the Pharmacy First scheme, with the likes of Pharmacy2U embracing online video technology to undertake patient consultations. It is anticipated many others will follow in a bid to obtain a share of the increased funding allocated to wider services provision.

FINANCE LANDSCAPE

There have been increases in distress in the sector, which has resulted in some high-profile administration appointments. Consequently, some lenders adopted a more cautious and conservative approach to funding in the first half of 2024, says Christie Finance. Some, including TSB, have withdrawn lending products from the sector, meanwhile, new lenders have moved to fill the gap, to the benefit of first-time buyers.

Over the last year, a third of all funding sourced through Christie Finance was for unsecured business loans, and there was an increase in funding for automation as mid-sized operators continued to invest in this and hub-and-spoke projects. Stocktaking Services company, Orridge, also saw a 24 per cent increase in pharmacies requesting stocktake valuations for automation solutions.

Jonathan Board, Director – Pharmacy at Christie & Co, comments, “With any operational efficiencies that can be delivered having now been delivered, the continued cost pressures are unsustainable, a situation which, without an urgent funding boost, will lead to further distress in the sector. With the recent news that clarity will not be seen until after the Chancellor’s Autumn Statement, contractors in England will have to wait to see whether any proposed increase will offer respite for the remainder of the financial year and how much this will offset further National Living Wage increases anticipated in April 2025. Although cost pressures will continue to be a feature for the foreseeable future, market appetite remains strong for those businesses that can weather the storm. Following the glut of corporate disposals over recent years, we anticipate that the market will return to some sense of normality as potential purchasers eye up more traditional independent pharmacy opportunities. Market appetite in England will be tempered by the outcome of the much-needed funding settlement negotiations.”

To read the full Pharmacy Market Review 2024 report, visit: https://www.christie.com/pharmacy-market-review-2024/

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For further information on this press release, contact:
Phoebe Hill, Associate Director – Corporate Communications
P: 07540 063 598 or E: phoebe.hill@christie.com