Merger boosts competition in nursing home market

February 6, 2006

The biggest institutional pharmacy (IP) in the country, Omnicare, bought up three rivals in 2005. Independent long-term care (LTC) pharmacists are uneasy, but Omnicare's customers, its chain rivals, and the Federal Trade Commission do not admit to having any qualms about the industry giant snapping up it its No. 2 competitor, NeighborCare.

The biggest institutional pharmacy (IP) in the country, Omnicare, bought up three rivals in 2005. Independent long-term care (LTC) pharmacists are uneasy, but Omnicare's customers, its chain rivals, and the Federal Trade Commission do not admit to having any qualms about the industry giant snapping up it its No. 2 competitor, NeighborCare.

"What I'm a little concerned about is Omnicare's purchasing power with suppliers and negotiating power with payers," said Ross Brickley, Director of Pharmacy of Neil Medical Group. "Large providers may be able to negotiate better terms than independents. With only three national providers, we may see an oligopoly develop that squeezes everyone else."

FTC has a different take on the future of LTC pharmacy. In mid-2005, FTC investigators concluded that "under current market conditions, Omnicare's acquisition of NeighborCare is not likely to result in anticompetitive effects.... The vast majority of skilled-nursing facilities have multiple rival IPs in their service areas."

Industry leader Omnicare, based in Covington, Ky., serves just under 1.1 million LTC beds in 47 states. The industry giant had been trying to acquire NeighborCare since the smaller company appeared.

NeighborCare, based in Baltimore, was spun off from Genesis Health Ventures in December 2003. The firm supplied pharmaceutical services to about 225,000 LTC beds in 32 states, making it the nation's No. 2 IP serving LTC facilities. The smaller company rejected a series of Omnicare purchase offers and hostile takeover attempts.

NeighborCare's reluctance to join forces with its larger rival eventually drove the acquisition price from $30 per share, about $1.3 billion, to $34.75 per share, about $1.53 billion. Omnicare also assumed about $245 million in NeighborCare debt, boosting the total price to $1.8 billion.

The combined company supplies more than 1.25 million beds in 47 states. In northern California, Omnicare now controls about 70% of the LTC pharmacy market, said independent pharmacist Paul Lofholm. "I either compete with them or I lose the business," he said. "The national chains have more marketing money to deploy than independents, but they tend to charge higher prices when they can."

The NeighborCare acquisition closed in July 2005. Omnicare followed up by buying RxCrossroads, a specialty pharmaceutical distributor, and excelleRx, a hospice pharmacy provider.

In financial terms, the acquisitions have been good for Omnicare. The acquisition was less rosy for some employees. During a conference call with industry analysts in early November, Omnicare CEO Joel Gemunder said the company consolidated 30 pharmacies during the quarter, consolidated a drug repackaging facility, and consolidated former NeighborCare staff into a single facility.

Omnicare had previously announced that it would cut 730 jobs as part of the acquisition, most of them in the two companies' pharmacies. Neither of Omnicare's national rivals, Kindred Pharmacy Services (Louisville, Ky.) and PharMerica (Valley Forge, Pa.), returned calls asking for comment on the acquisition.

Paul Baldwin, executive director of the Long Term Care Pharmacy Alliance (LTCPA), said there has been no appreciable impact on his organization as it moved from four members to three. "The competitive landscape has not changed much," he said. "There is a fair amount of movement of business between our members, between our members and independents, between independents and our members, and between different independents."

Baldwin said there are about 1,800 closed-door LTC pharmacies in the United States. LTCPA member chains accounted for about 500 of that number before and after the NeighborCare purchase.

The impact on independent LTC pharmacists varies. In Knoxville, Tenn., Diane Crutchfield, Pharm.D., is not worried about her own business because there are no Omnicare pharmacies in her service area. But she cautioned that other independents could feel the pressure.