Half year review: Transaction volumes indicate strong buyer appetite

Christie & Co’s Business Outlook 2019 report predicted the pharmacy market would undoubtedly see more pharmacies become available for sale in 2019 alongside a higher volume of transactions, with banks generally supportive on the sector, providing opportunities for first time buyers and fledgling multiples. Buyer appetite in the sector was expected to largely mirror that seen in 2018 and market consolidation would continue. The report also suggested optimism surrounding a timely agreement of the 2019/20 funding settlement would recognise the important role the pharmacy industry plays in the delivery of primary care.

 

Market overview

Christie & Co reports a 102% increase in its number of instructions year to date, with the number of pharmacies for sale buoyed by the Rowlands Pharmacy disposal of 70 pharmacies across England and Wales, brought to the market through Christie & Co in February 2019. The Rowlands disposal has been the most significant multi-site disposal portfolio to come to market this year, followed by Mid-Counties Co-operative’s announcement to put 22 of its pharmacies up for sale. 

As predicted, the volume of pharmacies brought to the market has influenced the appetite of first-time buyers and independent contractors. Year to date, Christie & Co has agreed 135 deals with a combined value of circa £97 million and reports an increase in the amount of sales agreed to first-time buyers and independent contractors, as in 2018. Additionally, demand has also been generated from small to medium-sized multiple operators, keen to acquire opportunities to improve their existing portfolios.

Government funding

The removal of the £50 million Category M clawback that affected remuneration over the five months to March 2019 will provide respite to contractors and return much needed cashflow to their businesses from the end of June. The successive clawbacks since July 2017 relate to historic overperformance of the sector against its funding contract. Whilst the contract allows the DHSC to implement further Cat M clawbacks in negotiation with the PSNC, it is hoped that further clawbacks will not be implemented for the foreseeable future, recognising the wider cashflow challenges contractors have had to endure. 

Negotiations regarding the 2019/20 funding settlement are ongoing between the PSNC and the DHSC, the outcome of which is not expected until October this year. The general view is that the negotiations may result in a drive to more service-led activity, recognised by the allocation of funding. It is hoped by many that a more long-term settlement will be negotiated in order to provide more certainty for the sector, opposed to the annual announcements that have resulted from negotiations in recent years.

 

Brexit

Over recent weeks, concern has been raised regarding the ability to finalise the 2019/20 funding negotiations, considering the political uncertainty surrounding Brexit, as well as domestically. Any changes in cabinet responsibility under the prime minister’s replacement could hinder the process.

 

Key transactions

Tower Court Pharmacy, a health centre adjacent, standard hours pharmacy in York, came to market as the vendor was struggling with travelling between his existing pharmacies. Christie & Co successfully agreed a deal on the site within six weeks of launching to market and completed within five months. This share sale was complicated by ongoing lease negotiations, but recommended solicitors and a motivated buyer were able to prevent any delay in the deal.

In March, Christie & Co completed the sale of Papworth Pharmacy, a health centre pharmacy located close to Papworth Hospital in Papworth Everard, Cambridgeshire. Instructed in early Summer 2018 and following a ‘best and final’ offers process, 16 offers were received, and a sale was subsequently agreed to an existing operator, well in excess of the quoted guide price.

Tony Evans, Head of Pharmacy at Christie & Co comments, "Activity has increased across all regions in the first half of the year, demonstrating continued confidence in the sector’s long-term future. Whilst uncertainty remains as the PSNC continues its funding negotiations, this hasn’t affected the appetite for pharmacy opportunities. With recent increases in funding announced in Wales and Scotland, plus additional transitional funding in Northern Ireland, it is hoped that a positive outcome will also be seen in England."

Chris Vowles, Head of Valuation Services – Medical at Christie & Co comments, "Despite uncertainty around the future of funding within England, demand for pharmacy businesses has remained strong, resulting in continued support from the leading lenders within the sector. Larger operators are concentrating on reviewing their position within the market from both a business and operational perspective, leading to refinance exercises and consolidation of assets. A number of operators have looked to other parts of the UK, such as Scotland and Wales, and Ireland, where funding arrangements for portfolio expansion are clearer."

Christie & Co will publish its Business Outlook 2020 report, presenting an annual overview and a forecast of the year ahead for all its sectors, including Pharmacy, in January 2020.