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Healthcare Community

Reduction in gross profit margin

Author: Richard Medes

Published: 21 May 2024

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Over the past 12 months several pharmacies have seen a reduction in underlying gross profit margin. This has been caused by several factors, including purchase price inflation, reimbursement prices not keeping up with inflation and a reduction in controls around purchasing.

The 5-year fixed pharmacy contract which came to an end on 31 March 2024 has also contributed to this position. The contract included no uplift in value over the 5-year period and funding was redirected away from dispensing through the removal of establishment payments.

As pharmacy accountants we need to be able to advise our clients on ways to improve the gross profit margin and set out below are some suggestions which you can discuss and work through with your clients.

  • NHS and private services – An increase in both NHS and private services will help to improve the gross profit margin as typically services will be at higher margin when compared to normal dispensing. Normally the salary costs in relation to services will be shown below in administrative expenses and will need to be factored in when working out the profitability of the service. It may be possible to centralise some of these services, which can be more efficient and also give pharmacist more time in the branch.
  • Review of prices for retail and over the counter products – A regular review of prices charged in branch should be undertaken and checked to the nearest competitor
  • Renegotiate purchases prices – For the main wholesalers we would recommend the prices being paid are negotiated on a regular basis, as they can change significantly
  • Buying system – Most pharmacies have a buying system in place and it is worth reviewing the system or completing an audit on the system to ensure the system is working
  • Budgets – It is worth setting a budget for each month on the amount the pharmacy wants to spend. The budget could be based on what gross profit margin your client is aiming to achieve. The budget will need to adjust in a growing pharmacy.
  • Controls within branch – Ensuring that stock when received from the wholesaler agrees to the deliver note and if stock is missing a credit note is obtained
  • Stock management – Over purchasing of stock can cause issues in relation in cash flow and can also lead to waste if the stock is not used. Putting a budget in place will also help this.
  • Purchasing ahead of seasonal changes – Where cash flow/storage allows, it may be worth considering purchasing significantly ahead of seasonal trends, such as purchasing at the start of the year for the hay fever period in the spring/summer

Overall, the pharmacy climate has been difficult in the last 12 months. However, there are a lot of positives going forward, such as Pharmacy First service, and therefore we need to be able to put our clients in the best place possible to take advantage of what is to come.

*The views expressed are the author's and not ICAEW's