Large multiples: feeling the financial squeeze

Great Britain’s big pharmacy chains may be able to leverage economies of scale but they are not immune to the financial climate affecting the sector, with the four largest — Boots, LloydsPharmacy, Well Pharmacy and Rowlands Pharmacy — all reporting losses or falls in their profits.

The second largest, LloydsPharmacy, has divested more than 200 pharmacies since 2016, and the fourth largest, Rowlands Pharmacy, announced in February 2019 that it plans to sell 70 of its branches.

The fact that large multiples, which make up 49.4% of the market and include companies with 100 or more pharmacies (see Infographic), are feeling the squeeze is perhaps not surprising. Like small multiples (companies with between six and 99 pharmacies) and independents, they have endured several financial challenges over the past few years.

The current funding climate is holding back community pharmacy from its huge potential to improve outcomes for patients and reduce the pressures on GPs and [accident and emergency] departments

“The current funding climate is holding back community pharmacy from its huge potential to improve outcomes for patients and reduce the pressures on GPs and [accident and emergency] departments,” says Margaret MacRury, superintendent director at Rowlands Pharmacy, which has 516 registered pharmacies in Great Britain (as of January 2019). “It also curtails the ability of the sector as a whole to invest in areas such as automation, which will unlock the kind of efficiencies which the NHS is seeking.”

Steve Howard, quality and clinical standards director and superintendent pharmacist at LloydsPharmacy, which owns 1,597 registered pharmacies, stresses that the challenges are not only connected to funding cuts. “It is also about business rates and the apprenticeship levy, among other things,” he explains. “As the external world changes, all businesses need to adjust to the evolving landscape,” he adds.

Businesses have also been hit by a difficult retail environment and a weak pound, explains Ross Muken, senior managing director for equity research at the investment bank Evercore ISI, which analyses the stocks of Boots’s and LloydsPharmacy’s parent companies. The value of the pound sterling has fallen by 20% since the UK voted to leave the EU in June 2016.

Challenging UK market

The latest financial reports for all four of the largest multiples make for stark reading (see Box 1). Boots, the largest of Britain’s multiples with 2,350 registered pharmacies, made a pretax profit of £498m in 2016, a fall of 4.8% from the previous year. Boots cites reductions in government funding and drug reimbursement rates, as well as competition from other retailers, as potential risks to the business.

There are no signs yet of Boots pharmacy closures in the UK, but its parent company, Walgreen Boots Alliance, launched a three-year “transformational cost-management program” in December 2018, which is targeting annual cost savings in excess of US$1bn.

“Boots has had a challenging period given the decline in consumer confidence in the UK,” explains Muken. “The retail part of the business has seen growth turn negative. It has a lot of economic sensitivity, particularly on the beauty side, and the cuts to dispensing fees have been absolutely brutal.”

Boots has had a challenging period given the decline in consumer confidence in the UK; the retail part of the business has seen growth turn negative

LloydsPharmacy has also had a challenging period. In January 2019, it revealed that pretax losses had grown to £181.4m in the year to March 2018, up from £148.8m the previous year.

In the highest-profile response among the big four multiples to funding cuts in England, LloydsPharmacy’s parent company Celesio UK announced in late 2017 that it would cease trading in 190 “commercially unviable” branches.

“This action was a result of cuts to reimbursement policy and increases in retrospective [Category M] clawbacks,” explains Howard.

Although LloydsPharmacy tends to be less retail-centric and its economic sensitivity is less, the cuts to dispensing fees have been very traumatic to the business and it has had to seek to close a number of stores

“Although LloydsPharmacy tends to be less retail-centric and its economic sensitivity is less, the cuts to dispensing fees have been very traumatic to the business and it has had to seek to close a number of stores,” says Muken.

There have also been falls in profits at both Rowlands Pharmacy and Well Pharmacy (see Box 1). According to the latest annual accounts, Rowlands Pharmacy reported a pretax loss on ordinary activities of £12.7m for the year to January 2018, down from a pretax profit of £4.5m the previous year.

The picture appears to be better at Well Pharmacy, the third largest of the multiples with 788 registered pharmacies. According to its latest accounts, pretax profit was £17.7m for the year ending 30 June 2017, down from £18.4m the year before.

Like its peers, Well Pharmacy says the major risks affecting the company relate to government funding policy and product availability. Lynn Krige, chief financial officer at Well Pharmacy, explains that over the past three years, pharmacy wage costs increased by around 12%, and property and utility costs increased by around 11%.

With pharmacy funding not being adjusted to take into account inflation and wage increases, we have had to work smarter to absorb these costs, the balance of which has a negative impact on the bottom line

“With pharmacy funding not being adjusted to take into account inflation and wage increases, we have had to work smarter to absorb these costs, the balance of which has a negative impact on the bottom line,” Krige says. “With the squeeze of rising costs and inflation, unlike other sectors, we are not in control of what we can charge,” she explains.

This, she says, combined with Category M clawbacks, has had a significant impact on the cashflow within the sector. “Pharmacies are under significant pressure and we are already seeing closures and consolidations,” she adds.

Investing in online

Despite these problems, the large multiples are planning for the future — in particular, choosing to invest in online services. “At Boots, we’ve always sought to ensure the dispensing process is as efficient as possible and have invested in technology to support this,” says Richard Bradley, the company’s pharmacy director.

Walgreens Boots Alliance stepped up its digital focus in January 2019, when it announced a seven-year partnership with the US tech giant Microsoft. The deal will involve new healthcare delivery models, technology and retail innovations, such as using customers’ digital devices to connect them to Walgreens Boots Alliance stores and services, and developing apps for chronic disease management. In the same month, Boots acquired healthcare technology company Wiggly-Amps. The acquisition will allow patients to order their prescriptions from Boots online by linking to their health records in a similar way to the NHS app. The company is now trialling an app-based ‘test and treat’ cystitis service that helps customers test for bladder infections at home.

Well Pharmacy has launched a ‘digital pharmacy’ for customers who choose to order their prescription online and have their medicines delivered via post. The company signed up around 25,000 people to its online NHS prescriptions service in the first six months.

In August 2018, Well Pharmacy also announced that it would invest £3.5m in its brick-and-mortar pharmacies and, later that year, it unveiled its first so-called ‘essential pharmacy’ in Manchester. The scheme is the latest stage of the company’s strategy to overhaul its dispensing model through use of prescription vending machines, online repeat prescription and smartphone services.

We have also launched our nascent digital pharmacy and are implementing a new patient medication record, which supports central fulfilment, freeing up pharmacist time for clinical care

“We have created a new ‘essential pharmacy’ concept store built around what customers said they want, including a secure 24/7 prescription vending machine,” says Krige. “We have also launched our nascent digital pharmacy [in 2019] and are implementing a new patient medication record, which supports central fulfilment, freeing up pharmacist time for clinical care.”

Rowlands Pharmacy is also focusing on making its dispensing processes more efficient through greater use of automation, such as off-site prescription assembly. “We have implemented a transformation programme to identify where we can cut costs and increase revenue,” says MacRury, who admits that the funding cuts have made it very difficult to sustain a commercially viable community pharmacy network.

Uncertainty continues

On top of the already tough financial climate, community pharmacies are also faced with the uncertainty caused by Brexit and the potentially catastrophic consequences a no-deal EU exit could have on the international medicines supply chain. “Like other sectors we need certainty in order to make sensible planning and investment decisions,” explains MacRury.

Scant detail on the government’s plans for the sector is also causing uncertainty. The ‘NHS Long Term Plan’, published in January 2019, outlines how the service will spend the extra £20.5bn per year promised by the government over the next five years, but makes little mention of community pharmacy, which has left the multiples wondering how it will impact them.

“The announcement by Theresa May that an extra £20.5bn will be made available to the NHS in England is very welcome, but we also need to understand the government’s vision for community pharmacy as a core service provider,” says MacRury. “That vision then needs to be backed by fair and sustainable multi-year funding.”

Until then, the outlook (see Box 2) will continue to look uncertain for the big four.