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Corporate operators set to become acquisitive in 2014 in pharmacy market

Simon Hughes from specialist property adviser Christie + Co reflects on the past year in pharmacy markets and predicts an acquisitive year ahead — for some

Supply and demand (Pricelessphotos/Dreamstime.com)

Towards the end of 2013, demand for pharmacy businesses outstripped supply

A high volume of deal activity continued across the UK pharmacy sector in 2013, albeit against a backdrop of further legislative and regulatory intervention, and supply and demand issues. Looking ahead, we see no reason for this level of activity to reduce.

Appetite unmet due to supply issues

In the lead up to 2013 we expected an increase in the number of pharmacy businesses coming to market. However, to a degree, this failed to materialise, despite a boisterous beginning to the year and a sense that the banks’ appetite towards community pharmacy remained strong. As we moved towards the end of the year, demand outstripped supply with multiple bids on the better quality pharmacies coming to the market.

The lack of opportunities to acquire substantive groups of pharmacies also meant that private equity took something of a watchful approach — the private equity houses’ ability to leverage on smaller, standalone deals left them virtually absent from the sector. MedicX Pharmacy’s acquisition (through Christie + Co) of five Hall & Stevens pharmacies in the north-west of England, backed by Cabot Sq Capital, was one of the few portfolio deals to complete in 2013.

Despite the relative security of income that the pharmacy business offers an investor, it seems that other less specialist- and asset-backed sectors may offer a more natural place for substantial private equity to invest.

The opportunity for private equity deals in the pharmacy sector in 2014 remain the same, although the culture of pharmacy remains fiercely independent and any merger activity in 2014, like the preceding year, is likely to be at the top end of the market.

In the independent market Christie + Co — boosted by its acquisition of Orridge Business Sales in 2012 — increased its sales of pharmacies more than three-fold. With stock availability at a low, we are likely to see further growth in distance selling contracts — bringing a new threat of competition to traditional community pharmacies. Pharmacy businesses operating via distance-selling contracts increased their market share in 2013 because those seeking to enter the market, including record-levels of newly registered  pharmacists seeking an outlet, were thwarted in their attempts to acquire 100-hour pharmacy businesses and now see obtaining distance selling contracts as being the most cost-effective way into ownership.

Existing distance-selling contracts are particularly sought after, not only as a cheap and effective route to market, but also because the time it takes to obtain a new distance-selling contract remains, occasionally, prohibitive. Sometimes the waits take up to a year, which is hampering the number of new openings. The market for these, and for community pharmacies which do find their way to the market, will also continue to be driven by declining pharmacist salaries, resulting in a number of first-time buyers seeking entry into the market.

Little impact from category M clawbacks

Elsewhere, category M clawbacks had little impact on the transactional market despite cash flow concerns at the beginning of 2013. The episode has highlighted how pharmacies and pharmacists have become better at managing fluctuations caused by category M pricing.

Although larger groups already made provision for clawbacks there remains a need for smaller owner-operator businesses to make suitable provision for the future.

100-hour contracts

In terms of the 100-hour exemption, although no new contracts were permitted after September 2012, any contracts approved before the cut-off date were still valid and it is not unusual for there to be a period of six to nine months from when the contract is approved to when the pharmacy opens. So, it was unsurprising that the rate of new openings did not slow in 2013. Indeed, as recently as December, we went to see a 100-hour contract that had only opened two weeks previously.

So we were not too surprised to see an increase in openings around the time when the exemption was removed because operators rushed to open before their approval lapsed. Equally, it was not unexpected that this extended into 2013. Under market entry legislation, any application for a new NHS dispensing contract will be considered with reference to the pharmaceutical needs assessment (PNA). If the PNA does not highlight the need for a new contract, you have to prove a need for the pharmacy that was unforeseen at the time the PNA was prepared. We have not seen a huge number of “unforeseen benefit” applications and even fewer openings under this test.

More bureaucratic burden

In 2014, we will see an increasing influence from NHS reforms and the proposed General Pharmaceutical Council environmental standards — if only from the perspective of adding further layers of bureaucracy. These additional responsibilities for operators may have the effect of decelerating deal times while pharmacies settle into the new regulatory and legislative framework.

The GPhC premises standards largely reflect current buyers’ attitude when purchasing a pharmacy, where they will consider in their bid the standard of fit out and provision of patient and staff facilities, for example, consultation rooms and good staff facilities. Buyers now expect to have a dedicated consultation room and will make a provision to provide one if necessary. The provision of a consultation room does not need to be expensive but will be seen as a basic requirement in the future.

It is also believed that the layout of a typical community pharmacy will alter with more thought around how and where the pharmacist and patient interact. At present, if a patient wants to have a private discussion with the pharmacist he or she either has to go into the consultation room or talk across the counter, often within earshot of other patients.

The more forward-thinking contractors will increasingly offer a private area to one side of the counter where the pharmacist can discuss medication with patients without the formality of sitting in the consultation room. Of course, this also allows the pharmacist to discuss other services more easily.

The ratings game

It is our understanding that the GPhC will rate the pharmacy and that, in due course, this information may be publically available — or at least available to a potential purchaser. As has been seen in other sectors — for instance, in long-term care, where care homes are subject to a star rating system. Where a business has a low rating, a buyer needs to assess the likely time and money required to bring the business up to an acceptable standard.

This may not just be physical changes, but staff training and, in some cases, staff changes. We would expect that a buyer would also need to demonstrate how he or she was going to raise the rating as part of the change of ownership process where the current rating was poor.

Although the standards remain at a prototype stage and findings will not be made public, we would expect the transactional market to start judging pharmacies on the GPhC standards, which could make a difference to the value of that business, up or down. In terms of the premises standards, we see that the market already accounts for the age, quality and layout of the fit-out and adjusts for either above average quality or the need to invest on day one. The infographic below illustrates our predictions for the pharmacy market in 2014.

Our predictions for the pharmacy market in 2014

This article was extracted from “Business outlook 2014”, Christie + Co’s unique look at the property and business environment across the leisure, care, retail and medical markets. To see the full report go to www.christie.com/en/publications.

See also: Focus — community pharmacy

The issue of Focus in which this article appeared was supported by GSK  

Citation: Supplements DOI: 10.1211/PJ.2014.11134167

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