NeighborCare to split off from parent Genesis

City firm would regain independence lost in 1996

Institutional pharmacy began here

Proposal would create 2 publicly traded entities

February 14, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

In a deal that would give Baltimore the corporate headquarters of a publicly traded company with more than $1 billion in annual revenue, Genesis Health Ventures Inc. announced yesterday that it plans to split itself.

The piece remaining in Baltimore and regaining its independence would be NeighborCare, the pharmacy and medical equipment company that Genesis bought in 1996.

NeighborCare has about 200 employees at its headquarters near the Inner Harbor and 1,250 in Maryland altogether, and is expected to add a few more when the split is completed.

The other part of Genesis operates skilled nursing homes and a rehabilitation business. It will retain the current Genesis headquarters in Kennett Square, Pa., and is expected to keep the Genesis name as well.

It, too, has significant operations in the region. Through a mix of ownership, leases, management contracts and joint ventures it operates 31 nursing homes in Maryland with 3,750 employees.

Each piece of the company generates about half of Genesis' $2.6 billion in annual revenue.

The split, which could take the rest of the year to complete, should have no impact on employees or patients, said Robert H. Fish, chief executive officer, who will be CEO of the NeighborCare piece after the breakup.

Before the separation becomes final, Genesis will have to allocate assets and liabilities, get Internal Revenue Service guidance to keep the deal tax-free, and decide how many shares in each of the new companies go to current Genesis stockholders.

Decoupling the companies will "unlock the value" in each part, Fish said.

"It really isn't too big a surprise," said James M. Berklan, editor of the trade publication McKnight's Long-Term Care News. "Why mix products when one might excel and another is struggling?"

The struggling piece is the nursing home industry. Medicare rates were cut in October, and state Medicaid programs, the largest payer for long-term care, are undergoing budget cutbacks. The industry also is concerned with a growing amount of liability claims.

A recent budget agreement increasing Medicare rates for doctors and some hospitals, Berklan said, meant that nursing homes won't get higher rates this year. "There's only so much money, and it went to the first two guys in line," he said.

The result of all the nursing home problems, Fish said, is a drag on Genesis stock. "The Genesis brand is associated with long-term care," he said, "so we trade at a long-term care multiple, not a blend" of long-term care and pharmacy.

The split should help NeighborCare's stock and give the company better access to capital to pursue growth, Fish said.

Genesis had said in October it was considering "strategic options," including the split or selling pieces of its business.

Dividing should give NeighborCare more opportunity to sell pharmacy services to non-Genesis nursing homes, some of which have been reluctant to do business with a company that's a subsidiary of a rival, Fish said.

He's also looking for institutional pharmacy acquisitions. "We buy $700 million worth of drugs per year," he said. "If we bought a billion or a billion and a half [dollars worth], the pricing would be different," and the company could improve its profit margin.

Filling prescriptions for nursing homes - known in the trade as "institutional pharmacy" business - provides the bulk of NeighborCare's revenue. Its 31 retail pharmacies may be better known in the Baltimore area, but represent only a small part of the company's business.

Fish said he also plans for NeighborCare to expand its retail and mail-order businesses.

NeighborCare was founded in Baltimore in 1980 with one pharmacy. By 1996, when Genesis bought it for $57.35 million, it had 500 employees and $70 million in annual revenue.

Genesis combined NeighborCare with its own institutional pharmacy and medical equipment operations. NeighborCare had $317.2 million in revenue and $29.6 million in earnings for the quarter that ended Dec. 31, according to Genesis.

NeighborCare's institutional pharmacy operation serves 250,000 nursing home beds, making it the second-largest in the industry, and it has 6,000 employees.

NeighborCare also owns Towson-based Tidewater Group Purchasing, which sells health care supplies to 4,000 customers, mostly independent nursing homes.

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