How pharmacies can navigate financial and operational challenges

Pharmacies are facing unprecedented financial and operational pressures which are coming to a head for many. Christopher McLean and Daniel Smith, Advisory Partners at Grant Thornton UK LLP, explain the key challenges facing independent pharmacies and how to effectively manage them...

A harsh funding regime that hasn't adapted to changing macroeconomic realities means the viability of large parts of the pharmacy sector is at risk unless the model changes. Very simply, across the sector, revenue has remained largely fixed while costs have increased significantly, making it impossible for many pharmacies to sustain their business models.

The sector has seen the closure of more than 1,500 community pharmacies since 2015, with 700 of these closures occurring since 2021. Larger pharmacy operators such as Lloyds, Boots, and Rowlands have seen the biggest decline in numbers, with smaller businesses operating between one and five pharmacies now accounting for almost 50% of the sector.

Despite rising inflation and business costs, the NHS pharmacy funding model has remained fixed. Over the period of the current Community Pharmacy Contractual Framework (CPCF) - 2019-2024 – pharmacies have experienced a 30% real terms cut in core funding leading to an annual shortfall of over £750 million, equivalent to £67,000 per pharmacy in England.

The current CPCF is due to end in 2024, and there is still no arrangement in place for future funding, leading to delayed and inefficient spending decisions and hampering the ability of the sector to plan and attract much-needed investment.

Operational challenges are further exacerbating the situation, with instability in the medicines market, both in terms of availability and price, ranking as one of the most severe pressures facing pharmacies. A report from Nuffield Trust in April 2024 showed the number of alerts relating to drug shortages has increased by 152% from 2020 to 2023, creating significant extra work for pharmacists and intensifying wider financial pressures.

Additionally, there is a shortage of community pharmacists, with many leaving the sector under the 2019 Additional Roles Reimbursement Scheme. The rise in the national living   wage in April 2024 has further impacted pharmacies' staffing costs. According to Community Pharmacy England, this added an additional cost of between £150-195 million to the community pharmacy sector.

Amid inadequate funding and operational pressures, pharmacists are also being asked to provide more front-line services than ever. The launch of Pharmacy First in 2024 has placed significant additional pressure on pharmacies. £645million of government funding was provided for Pharmacy First, but research from the Association of Independent Multiple Pharmacies found that 70% of pharmacy owners don't think this is sufficient remuneration for the time and clinical decision making involved.

The new Labour government’s plans for pharmacy are still unclear. Their general election manifesto set out plans for a community pharmacy prescribing service and stated that the party would aim to ‘shift resources to primary care and community services’, but further details are not yet available. On 9 July 2024, multiple pharmacy trade bodies wrote to Wes Streeting, the health secretary, warning that a community pharmacy prescribing service would only be possible with further investment in the sector.

How can pharmacies prepare for the future?

Implementing the best financing structures: Pharmacies have different financing options and getting the right mix can optimise cash flow. Some options that contractors can explore to find the best structure for their business include:

• Raising finance from the mainstream bank sector – there's appetite to support contractors because the NHS is a low-risk customer, although demonstrating cost control is critical
• Unlocking capital and cashflow from existing property portfolios, or raise development finance for distribution, warehousing, and hub centres.
• Asset-based lending (ABL) facilities may be appropriate for drug inventory in wholesaling businesses, and asset finance can be used to support the installation of automated dispensing robots, whether in-store or in distribution (hub) centres.

Whole business forecasting

With operators working under significant financial pressure and with multiple unknowns, accurate and granular forecasting is essential, both for business-as-usual and for seeking external financing.

Operational excellence – hub and spoke

The previous government’s response to the consultation on hub and spoke dispensing in May 2024 confirmed long-proposed changes to allow dispensing across different legal entities from 2025. In September 2024, the current government announced they were not in a position to implement this change by 1 January 2025, and there is currently no further clarity on timing. However, should the changes eventually be introduced, it would open up a range of possibilities. For larger operators, there would be an opportunity to improve utilisation at the hub by providing dispensing and logistics solutions to smaller contractors and even competitors. For smaller operators, there would be opportunity to outsource certain functions which can release working capital and potentially provide a better service to customers.

Indirect tax recovery from HMRC

VAT treatment of the single activity fee (SAF) has long been uncertain, but in June 2024 the NHS Business Service Authority updated its guidance to state that HMRC has determined the SAF should be zero-rated.

To the extent that pharmacies have historically declared output VAT and restricted input VAT recovery in relation to SAF income, there's now an opportunity to go back and make VAT reclaims. As with all retrospective UK VAT claims, this is capped by a rolling four-year window.

We would recommend considering this promptly to 'stop the clock' on the earliest periods in the four-year window and minimise any value falling out of time.

Going forward

Pharmacies should focus on their operational and financial resilience to maximise their chances of success.

It is a challenging time, and pressures may not subside in the short-term, but preparing for the future and remaining agile will be key to success.

Christopher McLean

Daniel Smith