At odds

Pharmer­ica, Omnicare deal on thin ice

Modern Healthcare - - The Week - Jaimy Lee

Whether Omnicare suc­cess­fully pulls off a bid to buy PharMer­ica Corp. may be tied to rec­on­cil­ing the com­pa­nies’ dif­fer­ent views about the po­ten­tial of an­titrust scru­tiny bog­ging down the deal.

Omnicare, the na­tion’s largest provider of phar­macy ser­vices for nurs­ing homes, went pub­lic with its in­ten­tion to ac­quire its next big­gest ri­val, PharMer­ica, in an all­cash deal val­ued at $716 mil­lion, in­clud­ing PharMer­ica’s debt. The Aug. 23 an­nounce­ment kicked off a pub­lic dis­agree­ment about previously pri­vate dis­cus­sions be­tween the com­pa­nies’ chief ex­ec­u­tives that started in April.

Louisville, Ky.-based PharMer­ica re­jected the un­so­licited con­di­tional pro­posal and adopted a poi­son-pill stock­holder rights plan two days later. Although it has made re­peated as­sur­ances that the board re­mains “open to ex­plor­ing all op­por­tu­ni­ties to max­i­mize value for PharMer­ica stock­hold­ers,” PharMer­ica said it be­lieves that the deal, if it moves for­ward, could face reg­u­la­tory scru­tiny.

“An­titrust clear­ance to com­bine the No. 1 and No. 2 play­ers in in­sti­tu­tional phar­macy is likely to be dif­fi­cult to achieve and in­volve lengthy ad­min­is­tra­tive and court pro­ceed­ings,” wrote PharMer­ica CEO Gre­gory Weishar in a let­ter to Omnicare CEO John Figueroa.

PharMer­ica is the sec­ond largest in­sti­tu­tional phar­macy provider based on rev­enue.

Omnicare, which is based in Cov­ing­ton, Ky., cur­rently makes up about 50% of the in­sti­tu­tional phar­macy ser­vices mar­ket, ac­cord­ing to David Lugg, an an­a­lyst with Stan­dard & Poor’s. He said the com­bined com­pany would in­crease Omnicare’s profit, as well as make its own op­er­a­tions more ef­fi­cient.

Ac­cord­ing to PharMer­ica’s let­ter, Omnicare re­quested con­fi­den­tial cus­tomer in­for­ma­tion to in­ter­nally as­sess reg­u­la­tory risks rather than em­ploy PharMer­ica’s pre­ferred use of a third­party. Weishar called the ap­proach “un­ac­cept­able be­cause mar­ket risk is much higher for PharMer­ica than Omnicare.”

Omnicare later said it is will­ing to use a third party to as­sess the con­fi­den­tial in­for­ma­tion. “While we have a num­ber of dis­agree­ments about PharMer­ica’s char­ac­ter­i­za­tions of our dis­cus­sions, we re­main will­ing, as we previously in­di­cated, to dis­cuss ways to rea­son­ably al­lo­cate the reg­u­la­tory risk, if any, in the con­text of broader dis­cus­sions about a com­bi­na­tion of our two com­pa­nies,” Omnicare said in an Aug. 25 state­ment.

Omnicare is no stranger to ad­dress­ing reg­u­la­tory risks. The Fed­eral Trade Com­mis­sion previously eval­u­ated the in­sti­tu­tional phar­macy ser­vices sec­tor dur­ing Omnicare’s ac­qui­si­tion of Neigh­bor­Care in 2005.

“Reg­u­la­tors in­di­cated that there are nu­mer­ous ca­pa­ble providers and rel­a­tively low bar­ri­ers to en­try that fa­cil­i­tate com­pe­ti­tion—which has been ev­i­dent in the strug­gles both (Omnicare) and (PharMer­ica) have en­dured in fight­ing for mar­ket share and or­ganic bed growth against smaller re­gional providers and ‘mom & pop’ re­tail­ers,” ac­cord­ing to an RBC Cap­i­tal Mar­kets re­port.

Bal­ti­more-based Neigh­bor­Care re­jected two of Omnicare’s pro­pos­als be­fore agree­ing to the $1.8 bil­lion ac­qui­si­tion. At that time, the FTC did not have very se­ri­ous con­cerns about the deal, Lugg said. “There’s a level of un­cer­tainly,” Lugg said, how­ever, about the FTC’s re­sponse to a deal with PharMer­ica. “The FTC could force di­vesti­tures of some op­er­a­tions.”

PharMer­ica said in its an­nual re­port that it com­petes not just with in­sti­tu­tional phar­macy providers of sim­i­lar size but also with re­gional and lo­cal in­sti­tu­tional phar­ma­cies, lo­cal re­tail phar­ma­cies, and re­gional and lo­cal phar­ma­cies that spe­cial­ize in long-term care. The com­pany said in the fil­ing that dis­tribut­ing drugs to health­care fa­cil­i­ties is highly com­pet­i­tive and, “be­cause rel­a­tively few bar­ri­ers to en­try ex­ist in the lo­cal mar­kets we serve, we may en­counter sub­stan­tial com­pe­ti­tion from lo­cal mar­ket en­trants.”

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