Has the season for goodwill hunting passed for pharmacists?

At the start of 2007, goodwill values for UK pharmacy businesses achieved record highs. Not only were pharmacies that dispensed large numbers of NHS items in demand but also pharmacies that dispensed around 2,000 items per month.

This situation had been building since 2003 for two reasons. First, the number of independent pharmacies has continued to dwindle, resulting in a reduced number of sellers.

Second, the implementation of the new community pharmacy contract resulted in an increase in gross profit for many pharmacy businesses. The result was a strong “seller’s market”, in which demand outweighed supply.

During 2007, some events weakened this trend and, furthermore, there are some events on the agenda for 2008 that may cause goodwill values to fall. Anyone who is considering buying or selling a pharmacy should take note.

Category M clawback

During October 2007, the Government made substantial reductions to Category M pricing in response to “greater than expected” pharmacy purchase profits. With the intention to clawback £400 million, this will have a significant effect on pharmacy profits.

For a pharmacy dispensing 7,000 items per month, this could equate to a loss of around £40,000 in profit per year. This has resulted in pharmacy buyers reducing the amount they are prepared to pay for the goodwill. In addition, some lenders have reduced their valuations of pharmacy businesses, therefore restricting the finance available to buyers.

Generally, this Government clawback has resulted in a 10–20 per cent reduction in goodwill value. The pharmacies that have been most affected are those that dispense high volumes of prescriptions.

Capital gains tax hike

Also in October 2007, the Government announced plans to increase the rate of capital gains tax from 10 per cent to 18 per cent, on the disposal of business assets made after 5 April 2008 (Retail Round-up October 2007, p1).

Many pharmacy owners have brought forward their decision to sell, in an effort to beat the 5 April deadline. This has resulted in more choice for buyers, who can now afford to be more discerning. However, as long as the pharmacy has been marketed properly and offered to the right buyers, pharmacy sales have continued to be agreed at the best price achievable.

Anyone thinking of putting their pharmacy on the market now would find achieving a sale before 5 April extremely difficult. The legal process alone normally takes two to three months, assuming there are no delays. This would leave virtually no time to market the pharmacy to achieve a good price.

Buyers are always looking for a bargain. Pharmacy sellers should consider whether a better offer at a later date would outweigh the increase in tax bill, before accepting the first offer they receive. An example is shown in panel 1.

Where are we now?

At the start of 2008, the pharmacy acquisitions market can still be regarded as a “seller’s market”. Under current conditions it is difficult to see this changing. With so few independent pharmacies left, demand still vastly outweighs supply. However, there are some uncertainties, which could rock the pharmacy market.

White Paper and Galbraith review

A White Paper that sets out proposals for the development of pharmaceutical services is expected to be published by the Government shortly. It will also incorporate a response to the Galbraith review regarding pharmaceutical contractual arrangements.

Uncertainty over the content of the White Paper has led to speculation in the pharmacy market. If the Government chooses to revisit the idea of lifting restrictions on control of entry, this could lead to a reduction in pharmacy goodwill payments. However, nothing is certain as yet.

Credit crunch

Since the downfall of Northern Rock bank last summer, there has been increased awareness of problems in the wholesale money market. This has yet to filter down into the business lending market.

However, if it does, restrictions on borrowing for pharmacy buyers could reduce goodwill prices. There has been no evidence of this yet, but only time will tell.

In the meantime, the pharmacy market remains buoyant. However, goodwill values will continue to fluctuate according to market conditions.