Zacks_Analysts' Blog : PharMerica Rejects Omnicare's Offer - Analyst Blog

PharMerica Corporation (PMC), a pharmacy management services company, recently revealed that its Board of Directors after due thought unanimously voted to refuse the unsolicited tender offer from Omnicare Inc. (OCR), which sells drugs to long-term care facilities and nursing homes, to take over the company for $15 per share in cash.

PharMerica’s Board believes that the offer fails to adequately value the company and is inimical to the interests of its shareholders. Furthermore, the offer has an illusionary component as it is subject to regulatory and other uncertainty. As a result, the Board unanimously advises that PharMerica shareholders refuse Omnicare's bid and not tender their stock. Deutsche Bank Securities Inc. is the financial advisor while Holland & Knight LLP is the legal advisor to PharMerica.

PharMerica’s Board observed that the price quoted by Omnicare has not budged from the unsolicited offer first privately made on July 19, 2011, and later made public on August 23, 2011. The complete rationale for the Board’s recommendation is presented in PharMerica’s Schedule 14D-9 filed with the regulatory authorities.

PharMerica’s Board rejected the unsolicited offer because it undervalues the company. Furthermore, the Board reposes trust in the strategic plan of the company. Secondly, Omnicare’s offer fails to reward PharMerica shareholders for the synergies to be derived from merging the two largest entities in the institutional pharmacy business. Thirdly, PharMerica has just concluded the acquisitions of ChemRx and Ark Pharmacy, which are expected to add value. Finally, the offer price does not incorporate the novel strategic value of PharMerica to Omnicare.

PharMerica’s Board also rejected the unsolicited offer deeming it as illusionary and prone to regulatory and other risks. Among other factors, a deal would likely undergo a prolonged regulatory review with no guarantee of Omnicare’s ability to complete the transaction. It is believed that antitrust clearance to merge the two leading players in institutional pharmacy would be difficult to attain.

Besides, the Board believes that the present climate is not congenial for receipt of timely regulatory approval. Moreover, such a deal would involve significant risk to be borne by PharMerica stakeholders. Other reasons for opposing the deal include Omnicare’s lack of willingness to assume the contractual risk of closure.

PharMerica’s Board rejected the unsolicited offer as it deemed the timing of Omnicare’s offer as opportunistic and a handicap for its stockholders. Specifically, the offer is coming at a time when Omnicare stands to benefit from PharMerica's lower equity valuation due to uncertainty emanating from healthcare legislation. Furthermore, the proposal is coming ahead of the spate of branded to generic drug conversions from 2012 onwards, which should benefit PharMerica.

PharMerica reportedly runs about 94 pharmacies in 44 states and serves long-term care facilities, hospitals and nursing homes. It was formed by the spin-off, in July 2007, and amalgamation of the institutional pharmacy businesses of AmerisourceBergen Corporation (ABC) and Kindred Healthcare Inc. into a stand-alone company.

Omnicare is a market leader in providing pharmaceutical care for the elderly. The industry is essential to serving the needs of the long-term care population. The company has reduced costs and increased efficiency through its “Full Potential Plan”.

However, the beneficial effects are partly offset by pressure from reimbursement cuts. Longer term, Omnicare will be able to offset some of these reimbursement cuts through better purchasing. Generics coming to market in the next few quarters present a substantial profitability opportunity due to Omnicare’s higher exposure to the institutional pharmacy channel than in past years.