Keeping America's pharmacies stocked is a full-time job for PharMerica, the country's second-largest institutional pharmacy operator (behind Omnicare). The publicly traded company provides purchasing, packaging, and dispensing of prescription and nonprescription drugs to patients at hospitals, nursing homes, assisted living facilities, and other long term care settings in more than 40 states. PharMerica operates about 100 institutional pharmacies from which it packages and delivers medications in unit doses (rather than in bulk) to its customers. It also provides consulting services to skilled nursing and long-term care facilities in which specialists monitor drug usage in accordance with government regulations.
The company received an unsolicited offer to be acquired by rival institutional pharmacy operator Omnicare in mid-2011 in a $716 million deal ($441 million in cash, plus debt assumptions). PharMerica promptly rejected the bid, stating that the offer undervalued the company. It also cited regulatory concerns over whether a merger of the top two industry players would be approved. Omnicare remained persistent, however, and took the bid directly to PharMerica's shareholders through a hostile tender offer. The FTC filed suit to block the deal over anticompetition concerns in early 2012, and PharMerica hoped Omnicare would drop the bid as a result; however, Omnicare stated that it remained committed to completing the deal.
PharMerica manages onsite pharmacies at about 90 US hospitals with nearly 364,000 licensed beds. The company's largest institutional pharmacy hospital client is Kindred Healthcare, which accounts for about 10% of PharMerica's income. The two were apparently enjoying their working relationship so much that in early 2011 they signed a provider agreement that lasts through 2013. Pharmacy management services include patient safety and regulatory compliance, work force optimization, and drug utilization management. Other services include inventory control and budgetary analysis.
It offers most, if not all, of those services online through its eService Center, a customer web portal that provides clients with a wide range of tools including help with medication management (ordering, refills, discontinues, returns), regulatory updates, formulary guides, billing, reporting, and management and utilization reports. PharMerica introduced the majority of its online services (including the eService Center) in 2010 to keep up with growing demand from customers for such services and to stay in line with the growing digitization of the US health care system.
PharMerica grows its operations geographically by acquiring smaller, regional competitors that operate in markets PharMerica wishes to enter. By continuing to consolidate in what is historically a highly fragmented market, PharMerica is able to secure its position as one of the largest institutional pharmacy providers in the country.
Some more recent acquisitions include the 2010 purchases of Integrity Pharmacy Services, which expanded PharMerica's operations further into Florida, Massachusetts, and Pennsylvania; Lone Star Pharmacy, a provider of pharmacy services to long-term care facilities in Texas; and the bankrupt Chem Rx, which provided long-term care pharmacy services in New Jersey and New York. Early in 2011 PharMerica entered the institutional pharmaceutical market in South Carolina by purchasing an institutional pharmacy there.
When it comes to income, PharMerica receives nearly half of its annual pharmacy services revenue from government payers, primarily Medicare. Other payers include institutional health care providers (30%), commercial insurance companies, and contracted providers. PharMerica keeps a close eye on changes to federal health care laws, especially those being batted around in Washington, DC, to see how they will affect its income. Obviously any cuts to Medicare reimbursements cause PharMerica's finances to take a hit.
Over the past few years the company has been beefing up the amount of generic drugs it dispenses as a way to reduce costs and capture more customers. About three-quarters of the prescription drugs PharMerica dispensed in 2010 were generic (compared to roughly 70% in 2008), and it planned to increase that number as more pharmaceutical companies lose exclusivity patents and additional generics are introduced to the market. However, selling generics is sort of a double-edged sword since a shift from brand-to-generic decreases PharMerica's revenue, at the same it improves gross margins. Recently, third-party payers have been reducing their reimbursements to PharMerica faster than they used to (when a generic loses exclusivity) causing the period in which PharMerica's gross margins are increased to be compressed. Due to this trend toward lower reimbursements in a shorter period of time, PharMerica is still determining its long-term generics strategy.
PharMerica was formed through the 2007 spinoff and merger of Kindred Pharmacy Services (from Kindred Healthcare) and PharMerica Long-term Care (from AmerisourceBergen). PharMerica Long-term Care contributed about 80 regional pharmacies that served more than 200,000 patients, while the smaller Kindred Pharmacy Services added another 46 pharmacies serving more than 100,000 patients. Also as part of the deal, PharMerica agreed to purchase a certain percentage of its prescription pharmaceuticals from AmerisourceBergen for five years, ending in 2012. Apparently the deal between the two was going so well that in 2011 they extended it to 2013.
PharMerica also buys pharmaceuticals and other products from contracts negotiated directly with pharmaceutical manufacturers. To obtain the best prices, PharMerica is part of an industry buying group that negotiates prices on its behalf.