More pharmacies seeking restructuring advice

Daniel French, a partner in law firm Gateley Legal, specialises in insolvency and business restructuring. Speaking to P3pharmacy, he says his team is increasingly fielding requests for assistance from community pharmacies as they battle a harsh trading climate. “It set us to thinking, what’s causing that?”

First off, he says, there are the “economic headwinds everybody’s facing at the moment – rising base costs, increasing wages and energy prices, and dealing with the higher inflationary environment that we’re all operating in.”

Then there are more sector-specific concerns. “Because of the way the Pharmacy Earlier Payment Scheme (PEPS) has been withdrawn and the payment structure that exists with the NHS, there is almost a fixed income for a number of these pharmacies.”

The recent Pharmacy First announcement is positive in that it signals some new money going into the sector, but it could require a level of investment many will struggle with.

French says the fixed funding envelope might have been easier to withstand before the present inflationary pressures, “but there isn’t any headroom built into that to accommodate the ramp up you see in wages and other costs”.

Increasing competition

As with other high street businesses, pharmacy faces increasing competition from online providers. The big multiples may have capacity to invest in their own distance selling operations in a bid to ringfence market share, but smaller businesses “inevitably fall off the pace”.

“The natural consequence of all this is that a number of businesses are facing liquidity challenges,” says French. “They have high fixed costs that have to be met week on week, month on month.”

While some businesses can “employ an element of credit to try and smooth out cash flow bumps”, he says this is “not really open to a community pharmacy; if [medicine wholesaler] payments aren’t made on the nail, the suppliers simply refuse to supply”.

Historically, pharmacy businesses – particularly mid-size operators with around 20-30 stores – will have sought to attract outside investment they could use to expand, develop services and streamline operations, says French. But due to a number of factors, including uncertainty around what the next five- year deal is going to look like, raising that capital can be “very difficult” at present. 

“It’s very hard to predict because it’s based on current numbers, which don’t make it look investable,” says French. “Or else you take a punt on the hope there’s a better deal negotiated six to 12 months down the line that makes the business more viable.”

With some in the sector facing solvency challenges, are pharmacies resorting to options like going into administration? It’s not that common yet, says French. “It’s such a regulated practice area,” he explains. “That regulatory and licensing regime makes it harder to use tools like a pre-pack administration as a way of reshaping the business. 

“Typically with a pre-packed structure, you don’t buy the shares in the company – you buy the business and assets because most buyers of an insolvent company don’t want to buy the shares in a limited company that’s insolvent because then you’re picking up all of the liability that goes with it.

“You would tend to structure your deal to say we’ll purchase the assets we want; with a pharmacy, that could be the stock and hanging on to the pharmacists as far as we can.

“But you have to get NHS approval to take on a business via a business and assets purchase, and there can be a delay of several months in getting that.”

Administration is usually “a bit more immediate than that” because the cash position “is driven by creditor pressure”, he says. More commonly, we see what French describes as “solvent but highly financially distressed sales – a deal where you’re buying the shares for a pound, but you’re prepared to take on a significant number of liabilities as part of the deal”.

French emphasises that while many businesses “trade while technically insolvent”, this creates risk as directors can be held liable for any losses incurred. “You have to be very careful and make sure you’re taking appropriate advice and recording all your decision making processes as to why it is appropriate to continue trading forward,” he says. 

Getting timely advice is crucial, he adds – something some neglect at their peril. “You need a period of time and a certain amount of capital to be able to deliver a successful restructure, whichever option you are choosing to implement. The challenge we face over and over again is that directors don’t recognise the need to engage with advisors early enough because they think they can muddle through.”

His main message for pharmacy contractors is that the key is liquidity. “As ever,” he says, “cash is king, so [you need] a really strong cashflow forecasting model, very strong management information, keeping a really forensic, close eye on all outgoings, pressure testing anticipated revenue streams, looking at anticipated expenditure, capital expenditure to make sure you’ve got a clear financial picture.

“You want at least a 13-week model, supported by a six months and 12 months model to accurately forecast any liquidity pinch points. That helps dictate for the management team whether they need to be taking steps to protect their position, seek new investment or take more dramatic action.”