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Implications of NHS Funding / Contract Changes to Pharmacies and Pharmacy Investments

Pharmacies have been more insulated from market pressures due to NHS funding and market rents / values have performed more robustly than the majority of other retail outlets. This is due to the specific registration of pharmacies under the Human Medicines Regulations 2012 which set down detailed guidelines and effectively dictates the number of pharmacies in any town / city. There has been a strong trend in recent years for pharmacies to be located within doctor’s surgeries / health centres.  Some pharmacy outlets have relocated to supermarkets. Pharmaceutical operators have been keen to secure outlets in doctor’s surgeries to effectively obtain a monopoly on dispensing to the specific patient list.

However, pharmacy funding from NHS England was subject to significant unforeseen cuts which were announced by the Government in late December 2015 and came into effect in December 2016.  These cuts amount to circa 12% of total income to pharmacies.  The implications of the cuts (referred to as the Government ‘bombshell’) is having implications on individual pharmacy viability and profitability, as Government policy seeks to centralise services, introduce robotic dispensing and reduce competing services to achieve cost saving.  The ability of pharmacy operators to pay premium rents has therefore been reduced and implications on Market Rents are still being assessed.  A scheme protecting essential pharmacy services where no competition exists (such as qualifying individual pharmacies in rural / village locations) has been introduced by the NHS to replace the loss of funding for 2 years.  This is known as the Pharmacy Access Scheme and payments are based on a calculation using historic levels of NHS funding to ‘top-up’ the current reduced levels of funding.

There is also a revised pharmacy contract being issued by NHS England which takes effect on 1st April 2017 and results in reducing reimbursement for pharmacies / drugs plus additional requirements to provide extended services.

Market Rents for pharmacies within doctor’s surgeries are not assessed on the normal rate per square foot/metre basis because they typically have a modest floor area and turnover is primarily dictated by the size of the patient list if located within a surgery or proximity to a doctor’s surgery and other pharmacies. Market Rents are therefore significantly higher than the equivalent rate per sq ft and the future ability of pharmacies to continue payment of such premiums may be limited by reduced funding and pharmacy contract changes.  The future covenant strength of pharmacy tenants to investor landlords may also be impacted which has implications for capital value and property investments.  Other changes within this sector including centralised dispensing, robotic dispensing, electronic prescriptions and on-line services may also have significant implications to pharmacies in the short to medium term future.

 

Robin wells BSc (Hons) MRICS

RICS Registered Valuer