Featured Health Business Daily Story, June 30, 2015

Specialty Pharmacy Proves to Be Attractive Space for M&A Activity

Reprinted from SPECIALTY PHARMACY NEWS, a monthly newsletter designed to help health plans, PBMs, providers and employers contain costs and improve outcomes related to high-cost specialty products. Sign up for an $84 two-month trial subscription today.

June 2015Volume 12Issue 6

The merger-and-acquisition (M&A) activity within the pharmacy sector continues, with CVS Health Corp. leading the way. And at least one industry expert maintains that there’s no reason to expect a slowdown.

On May 21, CVS said it had agreed to buy Omnicare, Inc. for $12.7 billion. The deal includes not only its long-term care (LTC) business but also the Omnicare Specialty Care Group, which consists of specialty pharmacy Advanced Care Scripts and pharmaceutical hub RxCrossroads. CVS is gaining 160 locations in 47 states through the purchase. The deal is expected to close by the end of the year.

Then on June 15, CVS said it had agreed to acquire more than 1,660 Target Corp. pharmacies in 47 states and 80 clinics for approximately $1.9 billion. CVS will brand the pharmacies within the Targets as CVS/pharmacy, and the clinics will be rebranded as MinuteClinic. CVS says it plans to open as many as 20 new clinics inside Target locations within three years of the deal’s close, and all new Target stores with pharmacy services will include a CVS/pharmacy. Target customers will have access to CVS’s Pharmacy Advisor, Specialty Connect and Maintenance Choice programs. By 2017, CVS/minuteclinic says, it plans to operate 1,500 clinics. And the companies will launch five to 10 TargetExpress stores that will include a CVS pharmacy. The deal expands CVS’s presence into new markets including Seattle, Denver, Portland, Ore., and Salt Lake City. According to the companies, “the timing of closing the transaction is uncertain.”

“Following a similar path as in the late 1990’s with long-term care pharmacy, specialty pharmacy has matured enough to undergo consolidation and roll-up into larger health care entities,” says Randy Vogenberg, Ph.D., principal and partner at the Institute for Integrated Healthcare. “Specialty represents a small distribution volume in the retail pharmacy space but also results in the greatest profit margin in a decreasing margin environment for pharmacies.”

Omnicare gives CVS “different opportunities but mostly short-term complementary growth and access to greater margins through a large specialty business,” says Vogenberg. Specifically, says Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates, Omnicare brings “limited-distribution drugs; RxCrossroads, which facilitates manufacturer copay-assistance programs; payer and manufacturer relationships; specialty pharmacy capacity; [and] assisted living and long-term care facilities, which are new drug dispensing channels for CVS.” He adds that there is the “potential for assisted living and long-term care facility support through nearby CVS retail pharmacies.”

“In the near-term, a key benefit from the Omnicare deal will be increased generic and specialty scale/cost-of-good savings,” Stephen Cichy, founder and managing director at Monarch Specialty Group, tells SPN. “CVS didn’t provide a synergy target but indicated there’s likely to be significant purchasing and revenue synergies with the combined companies, with purchasing synergies being realized first as CVS folds the Omnicare generic purchasing into their existing operations. Over the long term Omnicare offers CVS an expanded platform to potentially better manage care for older patients — who are higher utilizers of scripts — and further expand into the institutional pharmacy segment of the market.”

Omnicare Is Eighth Largest Specialty Pharmacy

According to Cichy, “As it relates to specialty, Omnicare is the eighth largest specialty pharmacy with approximately $1.7 billion in revenue. The pending deal will expand CVS specialty revenue by around 5% and enhances their services within the” rheumatoid arthritis (RA), growth hormone and multiple sclerosis (MS) classes.

While there had been some speculation that Omnicare or a potential buyer might split apart the LTC unit from the specialty pharmacy and pharmaceutical hub (SPN 5/15, p. 1), Rubinstein says that he doesn’t “see any Omnicare division as a poor fit with CVS.”

“With 75% of Omnicare’s current revenue base coming from LTC pharmacy and an expected large synergy opportunity to come from generics, Omnicare’s LTC business is likely to be developed and expanded,” adds Cichy. “Looking ahead, components of Omnicare’s assets that are likely to be attractive over time will be those that advance CVS’s relationships with hospitals and payers or those that create tailwind for its retail business as CVS looks to drive out costs and better manage the patient’s pharmacy utilization across all sites of care: retail, institutional, at the home, specialty.”

“While Omnicare has more overall revenue in its LTC division, its specialty pharmacy is a cash engine that contributed mightily to the price paid by CVS,” maintains Bill Sullivan, principal consultant at Specialty Pharmacy Solutions LLC, in a May 22 client alert. “An aging U.S. population, one that will increasingly include seniors that are on lifetime specialty therapies for conditions like RA, MS, HIV, etc., will fuel overall spend on specialty meds for decades. Having a captive specialty pharmacy...that serves its own population — as well as non-Omnicare customers — is a no-brainer. And swallowing Omnicare can only give CVS more sway over drug pricing, particularly in the Part D market. Lest we forget, those seniors are also the largest segment of cancer [drug] utilizers, and payers will want those patients out of hospitals ASAP to minimize cost of medical services and especially [to manage] oncology therapies.”

“The Target deal is a combination of short- and long-term impacts for both retailers,” asserts Vogenberg. Selling its pharmacies helps because “the exceedingly complex health care business is not a good fit for Target, which lacks the scale and expertise to thrive in the pharmacy world. One casualty would be Diplomat Pharmacy, who provided back-end specialty pharmacy services for Target.”

Expect More Specialty Consolidation

“Following the healthcare market shifts and impact of ACA [Affordable Care Act] implementation, applying principles of insurance and risk provides greater insight into the evolving world of health care stakeholders such as CVS Health,” says Vogenberg. “Size, specialty and consumerism are key components identified by CVS that make perfect sense in that context over the longer term but are also critical to business success today for the 2016 marketplace as well. Yes, it’s survival of the fittest, but also survival in a new business landscape requiring strategy in a marketplace that continues to change more frequently than in the past thanks to how risk (and thereby control) has been shifted in the marketplace downstream to consumers.”

According to Vogenberg, “Expect to see more specialty consolidation along with interesting bedfellows in upcoming deals through the summer.”

Cichy agrees. “With continued reimbursement pressure and fragmentation within today’s health care market, today’s specialty pharmacy sector remains highly primed for horizontal and vertical integration. According to our firm’s most recent estimates, strategic deal value is up 30% from prior years with a current median transaction” with earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple over the last 12 months for “these types of deals at 9.8x to 10x.” What CVS paid for Omnicare is “17.7x Omnicare’s FY14 EBITDA. This price is high, but consistent with a heavy valuation environment in today’s rapidly emerging pharmacy services market.”

Cichy declines to identify specific companies that could be acquisition targets, but he tells SPN that “the most attractive combinations relating to pharmacy services are likely to comprise PBM-specialty pharmacy provider tie-ups, home infusion-specialty pharmacy provider tie-ups, retail pharmacies acquiring specialty pharmacy providers, and/or insurance companies acquiring specialty pharmacy providers.”

© 2015 by Atlantic Information Services, Inc. All Rights Reserved.

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