Omnicare Sued by FTC to Block $440.8 Million Takeover of Rival PharMerica

U.S. regulators sued Omnicare Inc. (OCR) to block its $440.8 million takeover of rival drug-supply company PharMerica Corp. (PMC), a deal they said would increase prices for elderly nursing-home residents covered by Medicare.

Omnicare’s acquisition of Louisville, Kentucky-based PharMerica would give it the bargaining leverage to raise medicine prices for those covered by Medicare prescription drug plans, passing those costs on to U.S. taxpayers, the Federal Trade Commission said yesterday in a statement.

Omnicare offered $15 a share in August in an unsolicited bid for PharMerica, which the Covington, Kentucky-based company extended yesterday for a fourth time before the FTC’s announcement. The regulators’ complaint leaves little room for Omnicare to make changes or negotiate further, probably killing the deal, said A.J. Rice, an analyst with Susquehanna Financial Group LLP in New York. That would make PharMerica attractive to private equity firms, he said.

“It would be a natural buy for private equity,” Rice said. “It’s in a fairly concentrated market with two players in the space, and no chance of being topped by a strategic buyer because Omnicare will be out of the picture.”

An acquisition would give Omnicare control of as much as 60 percent of the market to distribute drugs to nursing homes, hospitals and hospices, said Jeff Jonas, an analyst with Gabelli & Co. in Rye, New York. Omnicare already is the largest such supplier.

‘Diminish Competition’

“If Omnicare is allowed to purchase its biggest and only national competitor, it will diminish competition and raise health-care costs, leaving taxpayers and patients to foot the bill,” said Richard Feinstein, director of the FTC’s bureau of competition, in a statement.

Omnicare said in a statement that it disagrees with the FTC decision and the deal for PharMerica would help lower costs. The company sought the acquisition to save money through automation and scale amid U.S. cuts to health-care spending, Omnicare Chief Executive Officer John Figueroa said when the bid was announced in August.

Omnicare declined less than 1 percent to $33.05 at the close of New York trading yesterday before the FTC’s announcement. PharMerica declined as much as 16 percent to $12 in extended trading after the FTC’s action. The shares had closed at $14.30.

National Networks

Omnicare and PharMerica operate about 300 long-term care pharmacies across the country that coordinate with nursing homes and contract with residents’ prescription drug plans, the FTC said. The network of pharmacies don’t provide medications to “walk-in” consumers, the agency said.

Omnicare had revenue of $6.1 billion in 2010, according to data compiled by Bloomberg. PharMerica’s 2010 revenue was $1.8 billion.

If the acquisition occurs, Omnicare’s competition for nursing home residents’ drug plans “would come from small, regional and local long-term care pharmacies, none of which currently operates in more than a few states,” the FTC said in its statement. Omnicare already has used its size to bargain for better Medicare prescription drug plan contracts, threatening to terminate them if the company’s terms were not met, the agency said.

Omnicare may have failed to persuade the FTC that its specialized market was competitive with retail pharmacies, Rice said.

NeighborCare Deal

The FTC in 2005 allowed Omnicare’s takeover of NeighborCare, saying that the company had many rivals in local areas and that the institutional pharmacy market was easy to enter. The commission also dismissed a concern that the Medicare Modernization Act would allow Omnicare to get above-market rates by coordinating with prescription drug plans.

“The FTC has already examined the institutional pharmacy industry, noting the numerous players and explaining how the ease of entry and other market conditions facilitate competition,” Omnicare said in yesterday’s statement. “The institutional pharmacy business is competitive and Omnicare is confident it would remain so after the transaction.”

Omnicare’s takeover offer had a value of $716 million including net debt, the company said in August.

“It undervalues PharMerica,” Gregory Weishar, PharMerica’s chief executive officer, said Jan. 12 at the J.P. Morgan Chase Health Care Conference in San Francisco. “Reasonable success in executing our growth strategy will lead to greater shareholder value than the $15.”

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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