Whether Omnicare successfully pulls off a bid to buy PharMerica Corp. may be tied to reconciling the companies' different views about the potential of antitrust scrutiny bogging down the deal.
Omnicare, the nation's largest provider of pharmacy services for nursing homes, went public with its intention to acquire its next biggest rival, PharMerica, in an all-cash deal valued at $716 million, including PharMerica's debt. The Aug. 23 announcement kicked off a public disagreement about previously private discussions between the companies' chief executives that started in April.
Louisville, Ky.-based PharMerica rejected the unsolicited conditional proposal and adopted a poison-pill stockholder rights plan two days later. Although it has made repeated assurances that the board remains “open to exploring all opportunities to maximize value for PharMerica stockholders,” PharMerica said it believes that the deal, if it moves forward, could face regulatory scrutiny.
“Antitrust clearance to combine the
No. 1 and No. 2 players in institutional pharmacy is likely to be difficult to achieve and involve lengthy administrative and court proceedings,” wrote PharMerica CEO Gregory Weishar in a letter to Omnicare CEO John Figueroa.
PharMerica is the second largest institutional pharmacy provider based
on revenue. Omnicare, which is based in Covington, Ky., currently makes up about 50% of the institutional pharmacy services market, according to David Lugg, an analyst with Standard & Poor's. He said the combined company would increase Omnicare's profit, as well as make its own operations more efficient.
According to PharMerica's letter, Omnicare requested confidential customer information to internally assess regulatory risks rather than employ PharMerica's preferred use of a third-party. Weishar called the approach “unacceptable because market risk is much higher for PharMerica than Omnicare.” Omnicare later said it is willing to use a third party to assess the confidential information. “While we have a number of disagreements about PharMerica's characterizations of our discussions, we remain willing, as we previously indicated, to discuss ways to reasonably allocate the regulatory risk, if any, in the context of broader discussions about a combination of our two companies,” Omnicare said in an Aug. 25 statement.
Omnicare is no stranger to addressing regulatory risks. The Federal Trade Commission previously evaluated the institutional pharmacy services sector during Omnicare's acquisition of NeighborCare in 2005.
“Regulators indicated that there are numerous capable providers and relatively low barriers to entry that facilitate competition—which has been evident in the struggles both (Omnicare) and (PharMerica) have endured in fighting for market share and organic bed growth against smaller regional providers and ‘mom & pop' retailers,” according to an RBC Capital Markets report.
Baltimore-based NeighborCare rejected two of Omnicare's proposals before agreeing to the $1.8 billion acquisition. At that time, the FTC did not have very serious concerns about the deal, Lugg said. “There's a level of uncertainly,” Lugg said, however, about the FTC's response to a deal with PharMerica. “The FTC could force divestitures of some operations.”
PharMerica said in its annual report that it competes not just with institutional pharmacy providers of similar size but also with regional and local institutional pharmacies, local retail pharmacies, and regional and local pharmacies that specialize in long-term care. The company said in the filing that distributing drugs to healthcare facilities is highly competitive and, “because relatively few barriers to entry exist in the local markets we serve, we may encounter substantial competition from local market entrants.”
