At the Charles Russell Speechlys pharmacy conference on 23 March, we provided some insights on the new regulations relating to consolidation of pharmacies. A number of questions arise from the new regulations and we are running a series of three articles, of which this is the second instalment.
As a brief recap from the last article, new regulations came into force on 5 December 2016 that allow two or more (non-internet) pharmacies to consolidate their services onto one existing site, and close the remainder site or sites. Consolidation can take place between pharmacies owned by either the same, or by different, owners. Where the latter, a change of ownership application will be necessary. Generally speaking, the services and hours of the continuing pharmacy will apply unless NHS England wants to continue the commissioning of enhanced services.
As set out in our previous article, perhaps the most important question pharmacy owners will be asking themselves is why they should consolidate pharmacies.
One reason may be where an existing 100-hour pharmacy business wishes to purchase a 40-hour competitor whose premises are in a more advantageous location, move over enhanced services from its existing premises, then close down its 'old' premises. Doing so under the new rules will ensure that it continues to commission enhanced services at a more profitable location, without having to worry that a new pharmacy application will be made at (or near) its previous premises as soon as it has closed.
In making their decision about whether to merge two or more pharmacy businesses, owners will not only need to take into account the financial savings of the merger, but also legal and practical issues relating to the closure of a pharmacy. If the merging businesses are owned separately, they will also need to consider the continuing relationship between the owners themselves.
If there are any roles within the pharmacy businesses currently being performed by two people which will only require 1 person in the merged business, owners will need to factor in the possibility of costs associated with making staff redundant. Owners should also have one eye on any lease that might be in place for the closing pharmacy and costs associated "surrendering" the lease back to the landlord (such as dilapidations and premiums on surrender). It would be wise to have a solicitor review the lease for the closing pharmacy at an early stage to avoid unwelcome surprises. If the pharmacies have different owners, as part of their discussions, they will also need to decide whether closure costs should be shared between them or not.
There will also be a number of other practical issues for pharmacy owners to consider and, again, these should be considered at an early stage. For example, third party consents are likely to be required (for example from banks, landlords, NHS England, patients (for repeat prescriptions and ETP nominations)). If each pharmacy business has a different superintendent, which one will be superintendent for the merged business and does that give rise to a potential redundancy situation? Does one pharmacy have better supplier contracts than the other and do those need to be transferred to the merged business?
Where different pharmacy owners wish to merge businesses, each should consider at the outset how much due diligence they wish to conduct on each other's business and whether it is appropriate to be protected against the disclosure of confidential information by the other pharmacy owner (after all the two pharmacy owners are likely to be competitors in the same area).
As well as the new regulations, the mechanism for the merger between different owners will be governed by a business transfer agreement. That agreement will set out which assets and liabilities will transfer to the newly merged business (as well as any warranties required from each pharmacy owner). It should also include provisions relating to compliance with employment regulations governing the way in which staff should be informed and consulted with as regards the merger, as well as their ongoing terms of employment.
Separately from the business transfer, the pharmacy owners should discuss and document (in a joint venture agreement) how their relationship will work going forward. That joint venture agreement should include provisions dealing with, for example, how the value of each pharmacy business translates into a shareholding (in the event that the merged pharmacy business is a company), whether the parties require special voting or economic rights, covenants restricting the parties from competing with the merged business and what happens if the parties cannot reach agreement on decisions relating to the operation of the merged business.
Merger may be an attractive option for many pharmacy owners and whilst there are various legal, practical and financial matters to consider, there is, of course, advice available along the way to ensure pharmacy owners can make the merger a success.
This article was first published by Pharmacy Buisness on 1 June 2017.