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What’s driving demand in the dental and pharmacy markets?

What’s driving demand in the dental and pharmacy markets?

Tuesday 21st November 2017

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Healthcare Bulletin - Issue 4

The dental practice and pharmacy sectors are extremely buoyant with demand far outstripping supply. The trend is the same across our regions with increasing numbers of buyers looking for dental practices and pharmacies seemingly uninhibited by the sluggish growth of the UK economy (0.3% in the second quarter) and the uncertainties of Brexit.

As the medical sectors rely on non-discretionary spend this tends to make them more resilient to the ebb and flow of the wider economic/political climate. They also, in many cases, include an NHS income stream, which is seen as guaranteed income and makes them attractive to investors. This is also the reason that banks and other lenders regard them as ‘green light sectors’ and are happy to lend.

The two sectors share many parallels in terms of the drivers fuelling buyer appetite.

An imbalance of supply and demand – but could this change if more NHS providers decide to sell their practices or more pharmacists become disillusioned?

Possibly, but demand is so high that any increase in market liquidity is hardly likely to have a significant impact. As a guide, we estimate that there are currently some 3,000 'active' dental purchasers in the market and only around 750 practices for sale annually. In pharmacy the picture is similar, we have in excess of 5,700 applicants registered and we estimate that out of c.7,700 independent dispensing chemists only 250 (excluding major deals) come to the market annually.

Regulatory - Both sectors are facing NHS changes with the recent funding cuts in pharmacy and the looming contract reforms in dentistry.

A lot has been written about the dental reforms (with 79 ‘High St’ dental prototypes in total), which ultimately means that dentists will receive their remuneration from a mixture of capitation and measured activity. In truth many dentists have adopted a ‘business as usual’ approach as the deadline for reform is likely two to three years away.

The reduction in funding to pharmacists, on the other hand, took effect as of December 2016 with much reporting on the negative impact to independent pharmacy values. In spite of this doomsday reporting, Christie & Co has seen little evidence of a negative impact with no slow down in the market nor a reduction in pharmacy sale prices. In fact, we are seeing increased competitive bidding from first time buyers and expanding regional operators.

In terms of dentistry, none of the above would automatically have a negative impact on demand. In fact, it might be argued that the greater emphasis on patient care and prevention makes NHS dentistry more attractive from a clinical perspective.

Locum/associate rates - As a result of the funding cuts, many operators are looking to mitigate the reduced remuneration. One of the biggest expenses in a pharmacy is the pharmacist, and by cutting not only the hourly rate but also the hours worked, many owners are seeing a considerable saving. This is driving demand from locums to buy pharmacies and at its peak in 2016, nearly 80% of our registered purchasers were first-time buyers.

Dental associates face similar challenges and are feeling the pinch too from their flat lining profits and this is leading many to search for their first practice.

Lender’s appetite – In dentistry GDS contracts are effectively in perpetuity and offer 'protected' income. These two factors are fundamental in supporting the market and any move to time-limited contracts could have a detrimental effect on the security of income and therefore banks' appetite to lend.

In spite of the cuts, banks still have a strong appetite for the pharmacy sector with new lenders entering the marketplace. Christie Finance, our sister company of commercial mortgage brokers used over 20 different banks and financial institutions in 2016 to help fund pharmacy buyers’ acquisitions and that number is only set to rise.

First time buyers in both these sectors are often helped by the ‘Bank of Mum and Dad’ with raising capital or providing guarantees.

Strong market conditions – Many Principals and pharmacists are receiving direct approaches from prospective purchasers for their business and it’s easy to think that selling ‘off market’ could be an attractive prospect. However, any owner should carefully weigh up their options when considering a sale to ensure that the value they’ve created, sometimes over many years, is fully appreciated on exit. Only by approaching the open market can sellers realise the best price for their business, by instructing a proactive agent to generate considerable interest.

If you are interested in hearing more about what's driving demand in the dental and pharmacy markets and would like to discuss any matters in more detail please do not hesitate to contact Jonathan on the details provided below.

Jonathan Watson
Associate Director - Christie & Co
T: 0161 833 6935
Email Jonathan