Will the New Community Pharmacy Funding Announcement Alleviate Challenges for Lenders and Investors?

The 2026/27 Community Pharmacy Contractual Framework (CPCF) funding settlement was announced on May 29, 2026, with a 10% headline funding rate increase for pharmacies, building on the materially improved 2025/26 funding terms. While the full details of the latest funding agreement are yet to be confirmed, the headlines seem promising. This includes a write-off of net over-delivery of contract funding (margin) earned up to the end of 2025/26 (up to £239 million) and an increase in the Single Activity Fee of 6 pence to £1.52. However, the devil remains in the details to understand the level of any funding clawbacks, which will determine the true effective funding rate uplift for pharmacies, as well as addressing unanswered questions, like whether this agreement will be backdated.

From the perspective of our ongoing projects, the pharmacy sector remains under significant pressure. Kroll’s experience shows mandates across the value chain, from drug manufacturers to community pharmacies, with recent work ranging from advisory engagements supporting businesses and their stakeholders to formal insolvency processes. These engagements increasingly point not only to operational stress but also to a growing level of credit risk across the sector.

Drug cost inflation, rising business rates and energy costs and an ever-increasing minimum wage have continued to weigh on the sector. A reported 47% of pharmacies were not profitable in their last accounting year; 78% of pharmacies in England were classified as “unsustainable in the short run”, with “a significant risk of interruption to National Health Service (NHS) pharmaceutical services offered in these pharmacies.” Further challenges have emerged, with pharmacies struggling to meet Pharmacy First payment thresholds, further increasing sector stress.

We are increasingly observing signs of financial strain in the form of tightening supplier credit terms, rising HMRC arrears and growing reliance on short-term liquidity measures, including wholesale trading at a low or negative margin on cash-upfront terms to generate liquidity. Such measures are often early indicators of stress that lenders should monitor closely.

Based on Kroll’s work supporting management teams in turnaround efforts, we have seen common themes emerging across pharmacy groups:

• Implementing area manager programs to drive closer store oversight and key performance indicator management
• Reviewing store opening hours to align with consumer demand
• Eliminating unprofitable prescription delivery routes
• Reviewing head-office costs, which are often not realigned to changes in trading footprint and other activities
• Shifting to a hub-and-spoke inventory distribution strategy to improve inventory management
• Increasing focus on NHS services and higher-margin private and enhanced services, such as weight management services to prevent overreliance on NHS income
• Basing portfolio rationalization not just on profitability but also on the ability to improve store performance and geographical factors
• Adopting a proactive, upfront approach to landlord lease negotiations to avoid aborted transactions, disposal delays and unbudgeted legal costs
• Expanding into online pharmacies as a low-overhead way of capitalizing on growing consumer preference for convenience

Regarding the final bullet, we have also seen such initiatives turn into an unwanted distraction for management. Therefore, such strategic steps require careful consideration.

For stakeholders, all these initiatives should be viewed not just as operational improvements, but as key indicators of management quality and responsiveness. The presence (or absence) of such actions can provide early insight into a management team’s ability to stabilize performance.

In particular, management teams should actively assess whether:

• Cost optimization measures are being implemented proactively, not reactively.
• Loss-making activities, such as delivery services, are identified and addressed.
• Portfolio estate strategy reviews should consider both profitability and operational efficiency (e.g., avoiding stranded stores).

 

Management Information: A Critical Credit Issue

The level of management information in the sector has often been limited. The sector has evolved in a manner that makes it common for pharmacy groups to not implement store-level reporting, making store profitability difficult to assess at the best of times. This can lead to management accounts that are produced with the use of target cost-of-sale margins, with management often having little to no understanding of store-level profitability or cost of sales, numbers that may often only become known when annual stock counts are completed as part of an audit process.

In our experience, weak management information is not just an operational limitation; it is a fundamental credit risk. It obscures true financial performance, delays intervention and undermines lender confidence in reported numbers. For lenders, this creates several challenges:

• Difficulty in assessing sustainable earnings before interest, taxes, depreciation and amortization (EBITDA)
• Limited ability to identify underperforming stores
• Reduced reliability of profit-based covenant testing measure
• Increased risk of unexpected working capital movements

As a result, lenders should especially emphasize:

• Short-term cash flow forecasting as the primary performance metric
• Detailed monitoring of the trade creditor ledger to assess supplier pressure
• A clear road map for implementing store-level profitability reporting

Put simply, what isn’t measured cannot be managed, and, in this sector, it often cannot be financed with confidence either. For lenders, the key question is whether community pharmacy remains a bankable lending proposition, or whether sustained margin compression is beginning to erode traditional credit protections and debt service capacity.

From a credit perspective, this level of sector-wide distress raises concerns regarding debt serviceability, particularly for leveraged groups that were underwritten on historically stronger margin assumptions. These factors are compounded by the lack of full visibility of the latest 2026/27 CPCF funding terms, which create additional uncertainty for lenders, particularly where forward-looking forecasts rely on funding assumptions that may not materialize, increasing refinancing and covenant risk.

 

Collateral Considerations

For lenders, an NHS debtor backed by government funding, combined with asset-heavy balance sheets, have often been a source of strong collateral, however, caution is warranted. NHS income remains a relatively secure funding stream, but management teams and their stakeholders must be mindful of:

• Timing differences and potential clawbacks within NHS payments
• The realizable value of stock, particularly where inventory controls are weak
• The limited recoverability of goodwill in distressed or forced sale scenarios

In stressed situations, asset values may prove materially lower than balance sheet carrying values, particularly where disposal timelines are compressed.

 

Early Warning Indicators for Lenders

Based on recent engagements, key early warning signs of distress include:

• Increasing reliance on locum pharmacists
• Failure to meet Pharmacy First activity thresholds
• Increasing trade creditor days and trade creditor ledger growth
• Rising NHS clawbacks
• Growing HMRC arrears
• Lack of visibility on store-level profitability
• Growing divergence between reported EBITDA and cash generation

 

Restructuring and Lender Strategies

From a lender perspective, available tools include:

• Enhanced monitoring and cash flow oversight
• Independent business reviews
• Milestone-based disposal strategies using credible valuation agents
• Amend-and-extend solutions where underlying viability exists

Kroll’s experience involving overleveraged groups suggests that when confidence in management remains, the use of controlled disposal programs can maximize enterprise value while avoiding the additional costs associated with formal insolvency processes.

However, early engagement is critical, as delayed action often leads to value erosion and fewer strategic options.