NeighborCare selling out to Omnicare

$1.8 billion deal threatens 500 jobs at Baltimore HQ

July 08, 2005|By M. William Salganik | M. William Salganik,SUN STAFF

Baltimore-based NeighborCare Inc., which grew over 25 years from a single Pigtown drugstore into a billion-dollar-plus supplier of prescriptions to nursing homes, announced yesterday that it has agreed to sell out to Omnicare Inc., its larger rival in the institutional pharmacy business, for $1.8 billion.

Although the companies didn't comment on plans for jobs, analysts were expecting sharp cuts among the 500 or so workers at NeighborCare's Inner Harbor headquarters. Those jobs "will be substantially reduced or eliminated," predicted Bruce Stuart, an economist at the University of Maryland School of Pharmacy.

Andrew Brimmer, a spokesman for Omnicare, said the company hadn't decided about the Baltimore headquarters jobs or the future of NeighborCare's 30 retail stores, mostly in and around Baltimore.

"As soon as we complete a thorough review of the combined company, we'll be in a position to make decisions," he said. Beyond that, officials of both companies declined to comment. The deal is expected to close this quarter.

Institutional pharmacies, such as NeighborCare and Omnicare, contract with nursing homes and other institutions to fill prescriptions for their residents. Omnicare, by far the largest in the country, already serves more than a million beds and will be adding 300,000 when it takes over NeighborCare.

With the combination, Omnicare projects about $6 billion in annual revenue; it will control nearly half the institutional pharmacy market. The company has headquarters in Covington, Ky., across the Ohio River from Cincinnati.

Negotiations brief

Yesterday's announcement brought a swift conclusion to talks between the companies. They disclosed only Tuesday that they had begun negotiating. But it took more than a year to bring the parties to the table for the nearly overnight deal.

Omnicare, known as aggressive and persistent in gobbling up smaller companies, first offered $30 a share for NeighborCare in April 2004. NeighborCare's board rejected the offer, saying the company could, over time, generate a higher value by building its business independently.

Last month Omnicare raised its bid to $32 a share after the Federal Trade Commission said the deal wouldn't violate antitrust rules. NeighborCare said that still wasn't enough and urged shareholders to reject it.

Under the deal announced yesterday, NeighborCare shareholders will receive $34.75 a share in cash - 15.8 percent more than Omnicare first offered a year ago. With assumed debt, the deal values NeighborCare at $1.8 billion.

"NeighborCare shareholders would have to live a long time to get this price through operations," Michael Bronfein, a NeighborCare founder who left the company in 1999, said yesterday. NeighborCare shares closed at $17.69 the day before Omnicare made its first offer but immediately jumped 58 percent, as investors bought in anticipation of an acquisition at $30 or higher.

NeighborCare shares closed yesterday at $34.57, up 21 cents. Omnicare shares closed at $47.22, up $1.19.

NeighborCare's path from single retail outlet to big institutional pharmacy involved several changes in direction.

Bronfein, now managing partner at Sterling Venture Partners, said yesterday that he and his brother-in-law, Stanton Ades, opened a retail pharmacy at Washington Boulevard and what is now Martin Luther King Boulevard in 1980. Ades is a pharmacist; Bronfein, with business training, ran the company part time while he was a senior vice president at Signet Bank.

The two developed the concept of "professional pharmacy." The stores were small and concentrated on prescriptions and medical equipment, not the sodas, suntan lotion and other front-of-the-store items that provide the majority of the revenue at many retail pharmacies. Most of the NeighborCare locations were in medical office buildings or hospitals.

In 1989, a neighbor of Ades who worked in a nursing home asked whether NeighborCare could fill prescriptions for the residents. "So, we said, `Sure,' not knowing what was really involved," Bronfein recalled.

Pharmacy business

The institutional pharmacy business "has no similarity to retail pharmacy, except they sell the same product," Bronfein said. In the institutional business, the pharmacies - generally huge, warehouse-like facilities that package pills into per-dose bubbles for nursing homes to administer - contract with nursing homes. Prices are generally determined by state Medicaid programs - about two-thirds of nursing homes residents have their bills paid by Medicaid.

"It's really about service and relationship and insuring your client is regulatory-compliant," Bronfein said.

By 1992, when Bronfein left the bank to become the full-time CEO of NeighborCare, the company had decided to develop the institutional pharmacy side. In 1996, it was sold to Genesis Health Ventures Inc., a Pennsylvania-based nursing home chain, for $57.25 million. At the time, NeighborCare had revenue of $70 million a year and employed 500 people in Maryland.

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