City-based pharmacy firm could double

Acquisition would expand local giant, NeighborCare

Its parent seeks to buy rival

But a higher offer may jeopardize sale

July 30, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

Under an acquisition announced yesterday, NeighborCare would nearly double the number of nursing home patients for which its institutional pharmacies provide prescriptions.

Genesis Health Ventures Inc., NeighborCare's corporate parent, said it had a $340 million deal to buy NCS Health Care Inc. of Ohio, the fourth-largest U.S. institutional pharmacy company, serving 203,000 nursing home patients.

Combined with NeighborCare's 248,000 patients, that would push the Baltimore company from the third-largest institutional pharmacy in the country to the second-largest. NeighborCare also has retail pharmacies in four states, including Maryland.

FOR THE RECORD - A photo caption in Tuesday's Business section incorrectly identified a NeighborCare pharmacy employee. The technician was Sheela Bhatt. The Sun regrets the error.

Even as the deal was announced, however, a complication arose.

Omnicare Inc., the largest institutional pharmacy operator and long rumored as a potential purchaser for NCS, said it had offered $3 a share in cash, plus assumption of debt, for NCS. The Genesis offer -- in stock -- is worth about $1.60 a share.

The only sure thing, said Charles W. Lynch, an analyst for CIBC World Markets, is that "a deal will happen."

Genesis said NCS shareholders controlling 65 percent of the voting power had already agreed to its terms. Lynch said that largely represents shares controlled by NCS' top executives.

"We believe we have a deal, and we have shareholder approval," said Lisa Salamon, a spokeswoman for Genesis at its headquarters in Kennett Square, Pa. However, she said of the last-minute Omnicare bid, "Obviously, we're concerned."

Cheryl Hodges, senior vice president at Omnicare, said, "In our view, we've made a very compelling offer," and hoped to win over NCS shareholders before they vote formally.

She said Omnicare would be willing to offer stock, rather than cash, and otherwise discuss the terms of a possible deal for NCS management. "In our view, this is not over," Hodges said.

NCS officials did not return calls seeking comment.

In a research note, Jerry L. Doctrow, an analyst for Legg Mason Wood Walker, wrote, "We believe the [Omnicare] offer is designed to delay the [Genesis] acquisition and perhaps force [Genesis] to increase its offer."

However, he wrote, "Omnicare faces a much greater risk of regulatory problems," since it already has a 40 percent market share, and would have more than 50 percent if it swallowed up NCS.

NeighborCare, with NCS added, would have about a 27 percent market share, Doctrow said.

Omnicare, based in Covington, Ky., and Genesis are fresh from a different bidding battle.

Genesis announced a deal last October to buy American Pharmaceutical Services Inc. out of bankruptcy for $42 million, plus up to $18 million in deferred payments.

But Omnicare outbid Genesis in a Bankruptcy Court auction and closed the deal in January for $97 million and up to $18 million in deferred payments.

Both companies are interested in NCS because size is important in an institutional pharmacy, according to Doctrow and Lynch.

Institutional pharmacies package and deliver prescriptions for nursing home residents.

The analysts said the acquisition would allow NeighborCare to negotiate better prices for medications, to buy directly from manufacturers instead of distributors and to combine some pharmacy facilities.

Salamon, the Genesis spokeswoman, said the company expects to save $15 million to $20 million by combining facilities and by increased purchasing power. No change in employment was expected at NeighborCare headquarters in Baltimore, which has about 100 employees.

The deal reflects Genesis' strategy to expand in health services, Salamon said. "The margins in nursing care are very low," she said, referring to the fact that Genesis also operates nursing homes. "As a public company, we have to grow in less regulated businesses, such as pharmacy and rehab."

Five of seven large nursing home chains -- including Genesis -- filed for bankruptcy in the past few years, in part because of large debt loads from aggressive acquisitions.

NCS shares more than doubled on the announcement, adding 86 cents to close at $1.60. Genesis shares gained 25 cents to $16.25. Omnicare shares closed up 99 cents at $20.46.

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