Capstone buying Integrated division $150 million deal for pharmacy division raises national profile

June 25, 1996|By M. William Salganik | M. William Salganik,SUN STAFF

Capstone Pharmacy Services of Baltimore yesterday announced it would buy the institutional pharmacy division of Integrated Health Services of Owings Mills -- a $150 million deal that doubles Capstone's annual revenue and makes it the second largest company in its field nationally.

"It's an important step in the company's history and future," said Dirk Allison, Capstone's CEO, who has overseen a turnaround in the company in the past year. Capstone fills prescriptions for nursing homes and prisons.

"It's going to take Capstone from a regional player to a national player," said Ray L. Wood, vice president for research at Anderson & Strudwick in Richmond, Va. "After this acquisition, they will be in nearly all the major markets in the United States."

Allison said that Capstone, already a leader in the New York and Chicago areas, would be strengthened in Florida, California, Pennsylvania and the Midwest. He said the deal made sense for Capstone because because there was little overlap in markets with Integrated's pharmacy division, which is called Symphony Pharmacy Services.

Integrated, which operates long-term care facilities across the country, said it will use the proceeds from the Symphony sale to reduce debt and make acquisitions in such areas as home health care.

Robert N. Elkins, chairman and CEO of Integrated, said rTC Integrated's facilities provided just 20 percent of Symphony's client base, and "we view pharmacy as a service that can be outsourced to a provider such as Capstone, whose critical mass will allow for economies of scale."

Earlier this month, Integrated announced it had registered for an initial public offering to sell off 81 percent of its assisted-living division.

Symphony brings a customer base of nursing homes and other long-term care facilities with about 40,000 residents in eight states. Capstone currently serves nursing homes with about 44,000 beds, as well as prisons with 120,000 inmates.

For Capstone, with annual revenue of about $105 million, the deal could increase revenue by as much as $115 to $120 million, Wood projected, which "allows them to leverage their overhead." The deal increases the number of pharmacy facilities operated by Capstone from nine to 35. Allison said Capstone might consolidate a few of the facilities into larger, more efficient ones, but he said he expected to retain all employees.

The jump in size also "allows us a great deal of ability to go back and work on purchasing," negotiating better volume discounts from suppliers, Allison said.

Wood said the expanded size and national reach of the company would position Capstone better to deal with large managed-care companies, which are moving rapidly to contract for care of the elderly.

Most institutional pharmacies are small, local firms, able to make deliveries quickly to the nursing homes they serve. Prices are generally set by regulation, so the most effective way for companies to move into a market is to buy a small firm and its customer base. While the local and regional companies still control 70 percent of the market, Capstone is one of four publicly traded companies growing nationally by acquisition. In addition to the independent institutional pharmacies such as Capstone, there are also several large "captive" firms owned by nursing home chains.

Capstone grew from a New York-based company called Choice Drug Systems, which acquired Rombro Health Services Ltd., a long-established Baltimore institutional pharmacy, in 1993. Last year, the company changed its name and moved its headquarters into the old Rombro facility on Washington Boulevard in Southwest Baltimore.

Capstone will pay $125 million in cash and $25 million in stock for Symphony. It plans to raise the cash through bridge financing from commercial lenders and the sale of $25 million in stock to Counsel Corp., a Canadian firm that is already Capstone's largest shareholder, with about 25 percent of outstanding shares. Eventually, Capstone plans to sell stock or debt offerings to pay off the bridge financing and provide additional working capital.

Wood said the increase in size would get Capstone noticed by institutional investors.

Allison said his company, which has bought several smaller companies in the past year, is still interested in acquisitions, but wants to concentrate on the Symphony transition. The deal, which requires antitrust approval, is expected to close next month. Integrated, with $1.2 billion in revenue last year, operates more than 600 nursing homes and other "post-acute" care facilities in 40 states, along with rehabilitation and home health services.

Capstone stock closed yesterday at a record $13.25 a share, up $2 or 17.8 percent. As recently as last July, it traded for $4 a share. Integrated closed at $24.25 a share, up 75 cents.

Pub Date: 6/25/96

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