A record increase in sales has set the stage for an exciting year ahead, creating new opportunities and driving strong momentum, says Tony Evans, head of pharmacy, Christie & Co

The market has been extremely active over the past year and there are little signs to suggest it is slowing down. Our team saw a record increase in sales activity – up 31% on the previous year – and we are expecting activity to remain strong into 2018.

Overall we witnessed an 18% increase in applicant registrations over the course of 2017, fuelled by an increasing number of first-time buyers on a drive for ownership. At the same time, banks continued to regard pharmacy as a positive sector and liquidity was invigorated by the addition of a number of the new challenger banks, keen to reap the rewards the market had to offer. Family funding – the bank of mum and dad – also remained a significant source of investment.

However, last year the pharmacy sector faced multiple challenges, most notably funding cuts introduced by the Department of Health and the £180m Category M clawback. With the clawback following hot on the heels of the funding cuts implementation, it is likely that this will continue to squeeze cash flow and operating margins as we progress through 2018.

With these and other pressures, pharmacy operators have had to continue to review the efficiencies of their businesses to
ensure that they are still able to maintain profitability.

Long-term confidence

Purchaser appetite during 2017 continued at levels consistent with those generated prior to the cuts, with many purchasers viewing the market with long-term confidence. Throughout the year we saw enquiry levels steadily increase, particularly from first-time buyers, largely locums and pharmacy managers, who have been spurred on in their drive for ownership, as their employers seek to mitigate costs by implementing initiatives such as reducing staff hours and locum rates.

In October, LloydsPharmacy announced the closure or sale of 190 of its stores, citing the funding cuts and higher business rates for creating market conditions that
were too challenging. The impact of the funding cuts will certainly be felt by pharmacies throughout England; however, contractors may seek some reassurance in the fact that market activity and appetite remain strong. When a pharmacy does come to the market, there is a large pool of motivated buyers out there seeking opportunities. Such has been the demand in the market that we have regularly seen competitive bidding resulting in premium offers, factors we expect to continue into 2018 as we predict the number of businesses for sale will increase.

Private equity continues to circle the sector looking to implement a ‘buy and build’ strategy to consolidate the market. New players also emerged in 2017 with Juno Health’s maiden acquisition of Ashchem Limited, a 15-strong pharmacy business, in October.

Bridges Fund Management continues to grow its presence as it invests through its Hub Pharmacy business. More recently, we have seen interest expressed by investors from other businesses outside of pharmacy, looking to obtain a presence in the sector through joint venture initiatives with existing multiple operators, something we expect will crystallise in 2018.