Pharmacy contractors face profit pressures despite sales increases- Hutchings report

First-time buyers lead 2024 pharmacy acquisitions in England, purchasing 52% of pharmacies sold so far  

Pharmacy contractors continue to grapple with profit pressures despite many reporting significant sales revenue increases, according to Hutchings Consultants’ England Pharmacy Market Update 2024.

The report emphasises that gross profit margins are under considerable strain due to factors such as rising wholesale drug costs, the dispensing of certain drug lines at a loss, reduced drug tariff reimbursements, and ongoing medicine shortages.

These challenges have led to a growing number of pharmacies reporting substantial declines in their profit margins this year.

For instance, Cohens Chemists reported a £5.7 million loss in the last financial year, even as sales reached £253 million.

Similarly, Day Lewis, the UK’s second-largest independent pharmacy chain, experienced a 5.9% sales increase driven by growth in prescription dispensing, over-the-counter sales, and pharmacy services, yet faced a 32% drop in pre-tax profits due to heightened administration costs, which included inflation-driven increases in staff, energy, utilities, and rent.

The average profit margin has declined to 33% in 2024, down from 34.4% the previous year.

The pharmacy sales specialist underlines that despite the pressure on profits, pharmacy contractors have managed to maintain operations and meet patient needs.

Regarding buyer activity, analysis from Hutchings Consultants shows that first-time buyers lead in acquisitions, purchasing 52% of pharmacies sold so far in 2024. This is followed by existing pharmacy owners, who account for 25% of the purchases, and group owners, making up 21%.

With the completion of larger corporate disposals, acquisition activity has shifted back towards opportunities within the independent pharmacy sector.

New buyer registrations have remained strong in 2024, although at a slower pace compared to last year, which saw a surge of interest following the Lloyds disposals.

The report reveals that approximately 79% of new registrants this year are first-time buyers eager to purchase their first pharmacy, followed by existing pharmacy owners seeking strategic expansion at 11%.

Notably, the number of investors considering market entry has increased significantly compared to the previous year, making up nearly 6% of new registrants, although they represent only 2% of completed acquisitions so far.

Last year, several larger operators engaged in consolidation and streamlining efforts, leading to the disposal of lesser-performing branches.

Boots has shut down 581 stores out of a planned 650 as part of its cost-cutting strategy. Meanwhile, Hallo Healthcare Group announced its intention to exit 64 sites, including those in NHS hospitals, prisons, community health trusts, and the private sector, with Rowlands set to take over five hospital-based pharmacies.

Following the mass disposals by Lloyds last year, the pharmacy market has regained some stability, prompting many independent sellers to pursue their own exit strategies.

Hutchings Consultants has observed an 18.3% increase in independent sellers listing their businesses for sale this year compared to the same period in 2023.

However, buyers have expressed concerns over increasing overheads, such as staff wages, energy, utilities, rent, rates, and increased loan costs, which have put downward pressure on some goodwill offers.

The report states: “As anticipated, average goodwill values achieved so far this year have varied across England, with those pharmacies located in London and the South East proving the most popular, with buyers achieving the highest combined average figure of £0.89 paid for each pound of turnover, followed by Midlands-based pharmacies at £0.79.

“Other regions around the country have achieved similar average figures, albeit to a lesser degree.”

According to the broker’s sales data, bank-funded acquisitions have accounted for over 95% of transactions in the past 12 months.

While inflation and cost of living pressures have eased with the Bank of England's base rate reduction to 5%, concerns persist about ongoing pharmacy costs.

“As a result, bank credit teams continue to focus heavily on the profitability of the target business in order to assess the buyer’s ongoing capacity to service the loan when considering applications,” says the report.

Market Predictions

The report highlights that the Pharmacy First Scheme and the change of government have injected some optimism into the market, anticipating further positive changes in the months and years ahead.

The broker says: “Although this government is in its infancy, initial messages delivered towards the sector appear more positive compared to those of previous years.”

Looking forward, the supply of new pharmacies on the market is expected to remain steady, with no large-scale divestments envisaged in the very short term.

The report states: “With the emphasis on the delivery of services to ensure profitability, many contractors will continue to implement exit strategies to allow new owners to incorporate necessary changes within the business.”

It also notes that group owners and multiples are likely to keep streamlining their existing operations through smaller branch disposals.

While buyer confidence remains positive yet cautious, the report predicts that further interest rate reductions could enhance optimism in the sector.

The report concludes by emphasising the importance of government proposals for community pharmacy in supporting buyer confidence.