March 31, 2021
  • Rushport Advisory

Pharmacy2U’s Proposed Sale

When you put a one paragraph post on LinkedIn about the possible sale of Pharmacy2U (“P2U”) and that post has over 10,000 views in a week you know it has nothing to do with the quality of your post and instead shows the level of interest that the pharmacy profession has in both this particular pharmacy and also the distance selling (“internet”) pharmacy model generally.

In this article I hope to go a little deeper into the world of internet pharmacy, particularly NHS pharmacies and provide some background and analysis of where we are now.

I will mention two things before going further. First, I refer to “internet pharmacy” here. The NHS uses the term “distance selling” but they mean the same thing in the context of this article. Second, I am a fan of internet pharmacy and I have worked with, or advised, most of the companies listed in this article at some point.

The exemption allowing NHS pharmacies to open up as internet pharmacies first came into being in 2005. Until then (and even now) the only other way to open a pharmacy was to show that there was a “need” for one and that is a very complex process. Obtaining consent to be allowed to open as an internet pharmacy is also difficult (as demonstrated by Pharmacy2U’s refusal in Leicester in 2020 discussed further below), but it is nowhere near as difficult as getting permission for a normal NHS pharmacy that can see patients face to face.

In theory this exemption should have set the English pharmacy market into a frenzy over 15 years ago. It didn’t. Pharmacists quickly worked out that the exemption was pretty meaningless as although the idea was for a technologically advanced, internet based pharmacy, the reality was that the NHS still issued paper prescriptions and these would need to be posted to the pharmacy before they could dispatch the medication to the patient. The NHS was embarking on a wonderful new IT project and told everyone that this paper prescription problem would not last long. It did. In reality it is only in the last few years that we have seen EPS really take over, from around 35% in 2016 to 76% of all items prescribed in July 2019 to 96% by the end of last year as GP practices have been forced, sometimes against their will, to adopt electronic prescribing.

Despite the problem with paper prescriptions there were a steady stream of entrants into the internet pharmacy space, of which Pharmacy2U (“P2U”) was the most notable. It is difficult to imagine that the founders would have thought that the business would not make a profit over the next 20 years, but as I will discuss later, the lack of profit does not mean a lack of value.

The combination of the move to electronic prescriptions and the internet pharmacy exemption for NHS pharmacies has seen a steady rise in applicants for this type of pharmacy especially over the last 5 years. There is an interesting and clear divide in what I see as different categories of operators namely;

  • Smaller independent pharmacy operators – these operators can trade profitably as a low-cost internet pharmacy.
  • Large Scale Operators – these operators lose considerable sums of money mainly due to the focus on investment in IT and operating systems as well as significant marketing costs. Their aim is to grow and they see market share as important.
  • Tech Entrants – it could be argued that these companies have little interest in operating a pharmacy. They are developing technology and services and see the value of their business as being in their technology.

I am not proposing to focus here on the smaller pharmacy operators and instead want to provide examples of what the other types of operator are doing.


Tech Entrants

In some ways these are the most interesting companies to watch even though many people will never have heard of them. A really good example is Dimec. Dimec was founded in 2013 by two Keele University pharmacy graduates, Andrew Bailey and Chris Turner. Andrew and Chris set up a distance selling pharmacy in Keele University and I watched as it dispensed very few prescriptions. To those who did not understand the “big idea” this seemed like a pointless exercise and a small loss making pharmacy.

What Chris and Andrew has realised was that the next big step for an online pharmacy was to be able to access the GP Systems of Choice (GPSoC) which was a contractual framework to supply IT systems and services to GP practices and associated organisations in England. [1]

If you got your pharmacy linked up to this system then in theory you could place prescription requests directly on to the GP system instead of phoning, faxing and emailing them to the GP practice. This would look like a request from a patient rather than a pharmacy and also helped when GP practices started refusing to allow pharmacy to order patients’ medicines directly.

When I spoke to Dimec back in mid 2017 they told me that “It’s taken over 2 years and we have the “proud” title of the fastest successful pairing! It’s either that or you lose the will to live: the process is positively glacial and massively laborious.”

This really was a great achievement. There is no facility for GPs to communicate with pharmacies in the same way, but Dimec had cracked the reverse process. They then set about getting their app launched and off they went. However, even with all of this, there was no massive spike in prescriptions dispensed. Whilst the GPSoC pairing was a huge deal, it didn’t really matter to patients as they didn’t understand it. The Dimec business model at the time was to let other pharmacies use their app and take a few pence as a fee per item ordered.

Dimec had built something that was valuable even though it wasn’t profitable and the newly formed Co-op Health promptly snapped it up for a figure purportedly somewhere between £6 million and £8 million (but I believe more like £4m to £5m). In the first 18 months of Co-op ownership (to January 2020) the pharmacy reached 5,000 items per month. During 2020 that number increased 900% to 45,000 items per month. COVID had arrived and Co-op was promoting the business.

Unfortunately being owned by Co-op was probably not the best place for this business to be. The Co-op Pharmacy team would need tens of millions of pounds to expand the business from where it is now and they were fighting for cash with other Co-Op brands, particularly food, who needed cash to support discounting their prices.

As one person said to me – “Co-op doesn’t have shareholders that you can ask for more money so you are fighting with the other businesses inside Co-op for what there is”.

Less than 3 years after Co-op Pharmacy was set up, Phoenix (who operate Rowlands and the Numark Pharmacy organisation) bought Co-op Pharmacy – and hence Dimec – for an undisclosed sum. I believe that Co-op will have been lucky to get out with a profit for their 3 years of ownership given the costs involved. The Co-op reason for selling was probably the same as Dimec’s was – they needed a lot more money to scale.

The question now is what will Phoenix do with their distance selling pharmacy operation? Copy Lloyds and their ECHO purchase and run it, of use the technology from Dimec and offer it to Numark members?

Another interesting entrant is Phlo. Phlo operates distance selling pharmacies, but it is really a tech company specialising in fulfilment. As Phlo says; “We’re innovating within the digital healthcare industry by creating a secure, easy-to-use online pharmacy app and delivery service that integrates with digital advances across the NHS”.

Phlo is not hiding itself from other entrants in the pharmacy tech space. Instead, it wants to partner with them and offer them its technology. Comparison can be a bit meaningless but think about Ocado. Yes, it was an online supermarket. Yes, that online supermarket lost a ton of money every year but, it had developed a tech platform that other supermarket operators who wanted to go online could use. Phlo’s most recent fundraising via Crowdcube was over subscribed and raised over £2 million in October 2020.


Large-Scale Operators – Pharmacy2U

When you think of large-scale internet pharmacies there is really only one name that dominates – Pharmacy2U (“P2U”). Even ECHO (now part of Lloyds), whilst massive, does not generate nearly as much interest or hostility from pharmacists.

It is fair to say that community pharmacists on the whole do not like P2U. Despite this, I admire what they have achieved in terms of getting the public to see the value in an online pharmacy proposition. It is difficult to know if P2U lives by the maxim of “all publicity is good publicity” or if they don’t care about offending other pharmacies. Recently the London Evening Standard has said it will remove P2U’s banner adverts that P2U paid to have underneath every pharmacy listing in the Evening Standard as they appeared to be misleading people into believing they were signing up for their local pharmacy when they were not.

P2U has an NHS contract for its original pharmacy in Leeds. However, P2U also operates a much bigger facility in Leicester which is interesting as it does not have an NHS contract.

In 2018 P2U applied for an NHS distance selling pharmacy contract at their new Leicester hub. This hub was being talked about by P2U as vital to their future and a lot seemed to be riding on its success. The local NHS Area Team approved the P2U application for their new hub, but this was appealed by Lloyds and Primary Care Appeals overturned the approval and refused the application. I do not intend to discuss that appeal here as I have already done so in the linked article.

One thing I was definitely wrong about was that I expected P2U to come back to the NHS with a new application and deal with the reasons for the first refusal. That has not happened. Despite not having an NHS contract I understand that the Leicester hub is busy “processing” prescriptions. You might wonder how that can be possible if they were refused permission for a new NHS pharmacy contract and the answer, it appears, is Hub and Spoke.

Without going into detail, the idea behind Hub and Spoke is that a pharmacy with an NHS contract, (“the Spoke”) can send prescriptions to another pharmacy owned by the same company that does not have an NHS contract (“the Hub”) for assembly.

But what does “assembly” mean? The NHS Regulations require pharmaceutical services to be provided at the listed premises (ie the pharmacy with the NHS contract) so it is commonly accepted that where Hub and Spoke is used, the Hub must return the assembled medicines back to the Spoke before they are provided to patients. That should mean that the Leicester hub is only assembling medicines and then returns them to the Leeds NHS pharmacy and it would be interesting to know how P2U does this.

A common theme when people discuss P2U is to say that it has no value because it does not make any money. I disagree. I think there is significant value in the business. A few years ago it was rumoured that P2U was trying to sell itself and was looking for a price of something like £120 million. That sale did not materialise, but they did receive a £40m investment for a majority stake. It is hard to immediately put a value on P2U from that investment as it depends on the nature of the investment and whether it included debt. It is also the case that the private market relies more on the relationships and common thinking between the CEO and the potential investor to determine value. Ever higher valuations based on ever higher projections become the norm (think SoftBank and WeWork).

Fast forward to 2021 and P2U is rumoured to be for sale again, with news of this sale first being reported by Sky News a few weeks ago.

For the year ended 31 March 2020 P2U reported a loss of £3.665 million, but that figure ignored some costs, with the Operating Loss standing at £6.767 million (down from a loss of over £16 million the year before). At the same time P2U reported having just over £3 million is cash. Without further investment the business was looking like it would run out of money and in January 2021 P2U registered a charge from Barclays Bank which suggests it borrowed money from them to continue operations. However, the list of assets covered by this charge were not very exciting and included things like a label printer and a conveyor belt.

P2U says it would be profitable before marketing costs, but when these are the driver of growth how can they be stripped out? To use a tech term, it would make sense if P2U was “sticky”, ie its patients stayed with them once they nominated P2U, but I would like to know what percentage of P2U patients are still active patients after 12 months (or even three months)? If you churn your customer base then you rely on expensive marketing to get new customers. It is like a bottle with a hole in it – you need the hole to be very small otherwise you need to keep pouring in water to get the water level to rise. In comparison, high street pharmacy is very “sticky” and needs to think about what it can do to remain that way.

Running out of money or needing new investment comes with rapid growth. P2U has certainly seen rapid growth and now dispenses over 1 million prescription items per month compared to under 100,000 a month only four years ago. I think this customer base has real value and I imagine that those looking at the P2U books right now think so too, but the question is – how do you unlock that value? But that is a subject for another time.

I said before in a LinkedIn post, P2U reminds me of one half of a £10 note. By itself that half can appear to have no value, but someone with the apparently equally valueless other half can come together with you and you now have £10. What P2U needs to show is that this combination exists even if they have not managed to find it so far.

Pharmacy2U brought technology to NHS pharmacy. One of the most important things for any business is not to fight technology or changing customer habits and desires but to embrace them. Many pharmacists see internet pharmacy generally and P2U in particular as the greatest threat to their business. But remember this – a distance selling pharmacy is a limited form of pharmacy. It cannot physically see patients to provide (nearly all of) its services. It is restricted in a way that “normal” pharmacies are not, yet it takes their business. When you answer why that is then maybe you can do something about it. I cannot help but be disappointed when I see pharmacy’s representative bodies issuing statements talking about “coming together to fight internet pharmacy” – really? Apparently a group of farmers got together to oppose the new technology of the tractor back in the 1930’s. That didn’t go so well.

But let me be clear, I do not agree with everything P2U has done. I admire the achievement of dispensing over 1 million items per month to patients but not always how it got there. And just for the record, I have never worked with P2U.

For what it is worth I believe that the last 20 years has seen an evolution in community pharmacy. In contrast I think the next 5 years could see revolution. Independent pharmacists will gain access to technology that they could not afford to develop by themselves (Numark buying Co-op for their GPSoC integration is a good example unless they keep it for themselves). At the same time bigger players will be searching for the other half of that £10 note. Alongside all of this the review of Hub and Spoke rules (I say review but there are not really any specific rules yet) could open up a Pandora’s box of problems and opportunities. It is not a good time to love the status quo (no offence to the band) and an exciting time to be entering the profession and developing clever ideas.

There are many other NHS distance selling operators and indeed private internet pharmacies that deserve to be mentioned here but this article is already too long.

Any mistakes I have made in writing this article are mine and mine alone and I apologise for them now.


[1] The GPSoC Framework ended on 31 March 2018, when a continuity agreement was agreed, to ensure that the essential core services from GPSoC remained available until a replacement GP IT Framework was in place.