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Tampa drug supplier merging

After PharMerica combines with a Kentucky institutional pharmacy, the resulting company will go public.

By KRIS HUNDLEY
Published August 8, 2006

PharMerica Long-Term Care, an institutional pharmacy headquartered in Tampa's Sabal Park, will merge with a competitor and be spun off as a public company early next year.

AmerisourceBergen Corp., which owns PharMerica, and Kindred Healthcare Inc. of Louisville, Ky., said they will merge their institutional pharmacy businesses to create an independent, publicly traded company. It will become the second largest in the industry, which provides drugs to nursing homes and assisted living facilities. Anticipated annual revenue of the combined company will be $1.9-billion.

The new entity has not yet been named, and a home base hasn't been selected. But soon after making the announcement Monday morning, the top executives of the two companies flew from New York City to visit PharMerica's Tampa office and speak directly to its 350 employees.

AmerisourceBergen's workers' compensation subsidiary, PMSI, which has about 300 employees in Tampa, is not included in the spinoff.

"This is a great transaction for PharMerica's employees," said R. David Yost, chief executive of AmerisourceBergen of Chesterbrook, Pa. "We're creating a company with great scale, which will enhance its ability to compete. And with growth, there will be great opportunity."

Yost also said the new company is open to incentives that could determine where it will be based. Kindred's pharmacy business is headquartered in Louisville.

"If you know anyone who can give us a tax subsidy, put them in touch with us," he told a reporter before flying to Tampa.

The new company will start with 119 locations in 41 states, with a customer base of about 330,000 licensed beds. Annual earnings before interest and taxes are projected at about $75-million. The companies said the merger is expected to save $30-million by eliminating duplicate costs.

The transaction is intended to be tax-free, with AmerisourceBergen and Kindred shareholders each holding 50 percent of the shares in the new company. Before the merger, the two pharmacy businesses will each borrow $150-million to give to their respective parents, leaving the new company with $300-million of new debt.

Shares in both AmerisourceBergen and Kindred rose after the spinoff announcement, as analysts generally applauded the move that frees the parent companies to focus on their core businesses. AmerisourceBergen shares closed at $43.18, up 46 cents; Kindred stock closed at $30.94, up $1.94.

Kindred, which had revenue of $3.8-billion in the past 12 months, operates hospitals, nursing centers and rehabilitation facilities, including three hospitals in the Tampa Bay area. Its pharmacy business last year generated $522-million. Kindred Pharmacy Services has three locations and 170 employees in the Tampa Bay area.

PharMerica accounted for less than 5 percent of AmerisourceBergen's past 12 months' revenue of nearly $60-billion, which largely comes from wholesale drug distribution. AmerisourceBergen supplies drugs to both PharMerica and Kindred and expects to keep the new institutional pharmacy as a customer.

"What this is going to do is unleash this so the new company can be totally focused on the institutional care business," AmerisourceBergen's Yost said. "Having the pharmacy owned by us has been to its detriment, to be brutally honest."

It won't be the first time PharMerica has been on its own. The company, which was created through the merger of two institutional pharmacies, Capstone and Pharmacy Corporation of America, initially went public in December 1997.

In April 1999, it lost independent status when it was acquired by drug wholesaler Bergen Brunswig Corp. PharMerica became a subsidiary of AmerisourceBergen when AmeriSource Health Corp. and Bergen merged in August 2001.

Eric Coldwell, an analyst with Robert W. Baird & Co. in Milwaukee, said institutional pharmacies need to get bigger to compete, especially since their margins have eroded under the new Medicare drug plans.

"With this deal, PharMerica gets closer to having the real scale and scope it needs in a highly fragmented marketplace," Coldwell said. But the new company will have to continue growing rapidly if it wants to catch up with the giant in the industry, Omnicare Inc. of Covington, Ky.

"Omnicare's pharmacy revenues are about $5.5-billion, so it's still at least three times bigger than the combined new company," he said. "They need to be able to leverage their buying power and R&D and bring operating efficiencies to the table so they can offer competitive pricing to their customers."

Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

PharMerica

Sabal Park, Tampa

Employees: 350 in Tampa, 3,000 nationwide

What it does: Institutional pharmacy services

2005 Revenue: $1.6-billion

History: Created and went public in December 1997 through merger of Capstone and Pharmacy Corporation of America; acquired by drug wholesaler Bergen Brunswig Corp. in April 1999; became subsidiary of AmerisourceBergen when the two drug wholesalers merged in August 2001

Future: Planned spinoff from AmerisourceBergen and merger with Kindred Healthcare's institutional pharmacy in early 2007 to create an as-yet unnamed public company

[Last modified August 8, 2006, 00:42:55]