Premier announced Tuesday it is bowing out of the increasingly challenging specialty pharmacy market, a move that drew praise from analysts.
The Charlotte, N.C.-based healthcare improvement company plans to sell its specialty pharmacy business, which currently serves 367 hospitals across 66 health systems, to a CVS Health subsidiary for $22.5 million plus up to $20 million for inventory. The companies expect to close the deal by June 30.
"What drove us to this place of moving specialty pharmacy was the market dynamics that have significantly changed since we undertook the strategy," Premier President Michael Alkire said on the company's earnings call Tuesday. "We just thought at this point in time it was in the best interest of growing the overall business and creating long-term shareholder value by selling the assets."
Increases in the so-called direct and indirect remuneration, or DIR, fees that pharmacy benefit managers charge pharmacies have made specialty pharmacy an increasingly tough business, some analysts said. Premier didn't directly call out DIR fees in its news release, and a spokeswoman declined to say whether the fees contributed to the decision.
Eric Coldwell, a managing director with Baird, compared Premier's specialty pharmacy business to gangrene in a lower extremity.
"Is it a good move to cut off the leg above the knee?" he said. "I don't know if I'd call it a good move. They did what they have to do to save the rest of the business."
Coldwell has studied the impact of DIR fees on pharmacies for the past several years. He said consolidation of the three big PBMs—including CVS Caremark—has made the situation worse because they're lowering reimbursement to the point where some pharmacies are losing money on prescriptions.
"The irony of all this is PBMs, including CVS, are the very ones creating the programs that are killing the companies like Premier," Coldwell said, "and then as these pharmacies die and these people are going out of business, they're forced to fire sale their businesses to the very companies that are setting the reimbursement rates that make it impossible to compete in the first place."
Asked about CVS' DIR fees, spokeswoman Christina Beckerman directed Modern Healthcare to a February 2017 news release that said the fees are allowed under CMS regulations and are fully disclosed as part of the annual bid process.
Premier wrote in its third-quarter earnings, which the company also released Tuesday, that compressed reimbursement in its specialty pharmacy business contributed to lower year-over-year earnings before interest, taxes, depreciation and amortization in its supply chain services segment. Premier drew non-GAAP, adjusted EBITDA of $133.7 million in the third quarter of fiscal 2019 in that segment, compared with $135.3 million in the prior-year period.
Premier runs its specialty pharmacy business through two subsidiaries, Acro Pharmaceutical Services and Commcare Pharmacy. Net proceeds from the sale to CVS' ProCare Pharmacy will be used primarily to fund costs associated with the transaction, exiting the specialty pharmacy business and for general corporate purposes.
"Premier's long-term strategy is to provide our member health systems with best-in-class solutions while at the same time actively managing our portfolio as we seek to deliver superior financial performance and long-term value for stockholders," Premier CEO Susan DeVore said in a statement.
Premier will be available to its current specialty pharmacy customers to assure a smooth transition, DeVore said, adding that the company picked CVS as the buyer because of its strong track record in patient care.
Beckerman wrote in an email that the transition will be seamless for patients. Prescription records will be transferred to CVS pharmacies. Those that receive specialty prescriptions by mail will receive them from CVS Specialty instead of Acro or Commcare, she said.
Alkire added that exiting specialty pharmacy better positions Premier to capitalize on its strengths and enhance its focus on care, growing business lines like supply chain, enterprise analytics and performance improvement capabilities.
As part of the deal, Premier expects to record a noncash impairment charge of $87 million to $92 million related to goodwill, purchased intangibles and other assets of the specialty pharmacy business. Premier also expects to incur a one-time pre-tax charge of $11 million to $15 million related to severance and retention benefits, financial adviser and legal fees. Those expenses will be recorded in the fourth quarter ending June 30.
Premier said it expects the deal to increase its consolidated adjusted EBITDA margin to about 45% for fiscal 2019 compared with about 34% for the six months ended Dec. 31, 2018. The deal is also expected to reduce annual consolidated net revenue by about $470 million and increase annual pre-tax income by about $6 million.
Supply chain services wasn't the only area of Premier's operations that saw lower year-over-year earnings. Its performance services segment drew non-GAAP adjusted EBITDA of $33.2 million in the third quarter, compared with $36.7 million in the prior-year period.
Premier's year-over-year revenue also declined slightly in the quarter to $422.9 million, compared with $425.3 million in the third quarter of fiscal 2018. The company's net income fell 3.5% year-over-year, to $73.8 million in the third quarter of fiscal 2019.
