Posted by: Ranveer Bassey10 SEP 2011
The business of pharmacy islargely ignored during the pharmacy degree. You're almost made to feel guilty if you talk about issues of money - asif to do so is to disparage the profession. But, whether right or wrong, community pharmacy is a business which,like any business, exists to make money.
I recently completed a ten weekinternship with Lloyds Banking Group. Whilst there I had opportunity to gain exposure to the financial aspectsof pharmacy. I've spoken to the Head ofHealthcare Banking and shadowed a Senior Healthcare Consultant during a meetingwith a pharmacy client regarding potential funding for an acquisition.
Community pharmacy as a sector isgenerally seen to have a strong risk profile. There are several reasons for this. The sector is relatively unaffected by the condition of the widereconomy as people always need medicines. Storefront sales may decrease but these generally account for a smallproportion of a pharmacy's revenue, despite offering larger margins than thedispensary.
The outlook for the sector ispositive. Income from dispensing isincreasing, driven by an aging population and more expensive medicines. The Government has been clear in its beliefthat community pharmacy should play a greater role in health. This implies an increase in services with theadditional income streams these bring.
The removal of control of entryrequirements, which new pharmacies need to meet before being allowed to open, forcertain types of pharmacies has presented challenges. It has the effect of diluting income as thereare more pharmacies chasing the same number of prescriptions. Supermarkets in particular have used theseexemptions, especially the 100-hour pharmacy exemption, to bolster their marketshare. A third of Tesco pharmacies are100-hour pharmacies.
Interestingly, I've heardsuggestions that supermarket pharmacies are loss leaders. Whilst not being directly profitable, theyincrease footfall which in turn increases profitability for the store overall. 100-hour pharmacies in general are rarelyprofitable.
Category M is another pressure,with clawbacks eating at the bottom line. Some fear that the days of the independent are numbered givencompetition from national chains and supermarkets, with their economies ofscale and business-orientated approach. I'm more optimistic. I thinkwe'll see fewer single-store independents and more local chains which tend tobe run in the same business savvy way, whilst maintaining the local knowledgeand ethos that customer's value.
Lending provided to pharmacies isnormally of the ‘vanilla' type in the form of loans and overdrafts. The majority of loans are to fundacquisitions, expansion or refurbishments. Loan guarantee schemes exist where wholesales will guarantee a loangiven by a bank. The pharmacy mustundertake to purchase at least 70% of their pharmaceutical goods from theguaranteeing wholesaler. This shifts therisk for the bank from a potentially single-store independent, to amulti-billion pound organisation. Theterms of the loan for the pharmacy are more favourable as a result.
Pharmacy cash flow is somewhatunique. NHS Prescription Services, who reimburse prescriptions, do so in two lots. 80% of the forecasted reimbursement isprovided three months after prescriptions are sent for pricing, the remaining20% is then provided in month four. Thisleaves a full three month gap where overdrafts are key in maintaining workingcapital to cover expenditure.
The mechanics of how communitypharmacy functions as a business is what pays wages and secures nationwideaccess to medicines. An understanding ofthese mechanics would help inform profiteering versus professionalismdecisions. Perhaps universities shouldbe less timid when covering this aspect of pharmacy.
If you'dlike to learn more about what Lloyds Banking Group is able to offer pharmacies,you can read more here.
The views expressed in this blog are my own and do not necessarilyreflect the views of Lloyds Banking Group.