NeighborCare is to be spun off in Dec., open local headquarters

Pharmacy chain to split from parent Genesis, nursing home operator

November 18, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

NeighborCare, a pharmacy chain that once promoted its home-delivery specialty in commercials by depicting druggists being catapulted across neighborhoods, will commence a different kind of launch Dec. 1.

That day, the company will spin off as Baltimore's newest corporate headquarters, its parent company announced yesterday. The parent, Genesis Health Ventures Inc., decided to split NeighborCare from its nursing home business as it reorganized after emerging from bankruptcy protection in 2001.

Michael Bronfein, now an Owings Mills venture capitalist and leading Democratic Party fund-raiser, founded the pharmacy in 1980 with his brother-in-law, Stanton Ades, a pharmacist.

NeighborCare grew into a small chain of retail pharmacies, with about 30 stores in hospitals and medical office buildings. It offered home delivery, a point it hammered home in offbeat television commercials showing flying pharmacists.

A neighbor of Ades who ran a nursing home asked whether NeighborCare could fill prescriptions for his patients. The request led NeighborCare into supplying medicine to nursing homes, a business that eventually came to dwarf the retail operation.

At warehouse-size "institutional pharmacies," NeighborCare packs pills into trays and bubble packs for delivery to nursing home customers. The company also provides "infusion services," preparing bags of medication in hyper-clean rooms to give to patients intravenously in nursing homes or at home.

NeighborCare is much larger than when Genesis, a nursing home chain with headquarters in Kennett Square, Pa., bought it in 1996. Then, it had 500 employees and $70 million in annual revenue.

Now, after being combined with other Genesis operations, NeighborCare has 6,000 employees across the country with annual revenue of about $1.3 billion.

"We're looking at acquisitions as we speak," John Arlotta, who will become NeighborCare's chief executive officer after the spinoff, said in a recent interview.

"There are significant economies of scale" for companies such as NeighborCare, said Jerry L. Doctrow, a long-term-care analyst at Legg Mason Wood Walker in Baltimore. "You can buy drugs cheaper for 300,000 beds vs. 300 beds."

"It's a very good business," said Doctrow, who has a "buy" recommendation on the stock and whose company has done investment banking work for Genesis-NeighborCare. "The company has significant market share. The number of elderly going into institutions is increasing, and drug utilization is increasing."

NeighborCare provides prescriptions for about 250,000 nursing home beds, about 11 percent of the market. That makes it the third-largest in the business, slightly behind Tampa, Fla.-based rival PharMerica Inc. Kentucky-based Omnicare Inc. is the leader in the institutional pharmacy business with a 36 percent market share and nearly 1 million nursing home patients.

Until a decade ago, most institutional pharmacy work was done by small local and regional operators. The drive for economies of scale and the desire of growing national nursing home chains to find national suppliers led to a period of "roll-up" consolidations that created today's three big companies.

After the big three, the remaining half of the institutional pharmacy market is divided among local and regional companies - the "mom-and-pop" operators that NeighborCare sees as potential acquisition targets.

Separating from Genesis will give NeighborCare its own stock, expected to trade under the ticker symbol NCRX on the Nasdaq stock market. Doctrow said that should generate a higher share price than if the company remained coupled to a nursing home chain. The nursing home industry has been buffeted by reimbursement cuts, liability cases and a wave of bankruptcies.

Within Genesis, a squeeze on nursing home reimbursements reduced profitability in the most recently reported quarter, which ended June 30. But Robert H. Fish, the company's chief executive officer, credited "NeighborCare's increasing operational strength with double-digit revenue growth and expanding margins" as a highlight.

NeighborCare stock, particularly if it appreciates, could be used to buy other institutional pharmacy companies.

"Once we're split and demonstrate a track record," Arlotta said, "we'll have a currency to make acquisitions."

Acquisitions also poses risks.

In a credit report on NeighborCare last month, Moody's Investors Service listed negative factors impacting its rating of the company, including price pressures in the industry, cuts in Medicaid reimbursement and "Moody's concerns over potential acquisition activities," which would increase debt.

Besides acquisitions, Arlotta said NeighborCare can also increase business from its existing pharmacies, in part because some nursing home chains were reluctant to buy from a unit of Genesis, a competitor.

It doesn't have to worry about losing its largest customer, however; NeighborCare has a 10-year contract to serve Genesis.

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