Use Asembia to Take Stock Before Going to Market
Author: Shannon L. Wiley and Michael R. Hess
Asembia is great not only for networking conversations that can lead to transactions but also for taking stock of your organization, identifying the capabilities that would complement your strategic position and, perhaps, discovering potential partners to fill those needs.
This year is off to an active start in specialty mergers and acquisitions, and synergy is the name of the game. That means pharmacies looking to go to market in the next 18 months can take steps to be better positioned for integration and scalability. Also, investors and strategic buyers can hone diligence checklists to find the best suited targets.
We are seeing vertical power plays in the large-scale transactions, such as CVS/Aetna, ESI/Cigna, and McKesson’s purchase of RxCrossroads and CoverMyMeds. However, Diplomat’s 2017 acquisition strategy is more in line with typical specialty pharmacy acquisition plans—a focus on building existing capabilities and expanding into adjacencies. In 2017, Diplomat purchased pharmacy benefit managers LDI Integrated Pharmacy Services and National Pharmaceutical Services, infusion pharmacies Focus Rx and Accurate Rx, as well as WRB Communications, a communications and contact center. Strategic investors and private equity firms are still aiming to build enterprise strength, but specialty pharmacies should not expect revenue and patient volume to carry the day—unique tuck-in capabilities are a must.
Integration capabilities, scalability, and a stable platform are hallmarks of a desirable target. A specialty pharmacy can take certain proactive measures to be more attractive and improve its position to hit the ground running post acquisition. A buyer, particularly one rolling up an enterprise, should be planning its exit when buying pharmacies. Corporate structure and asset allocation within the enterprise are fundamental drivers in a seller’s strategy. Specialty pharmacies that consider exit strategies from the outset will be well served.
Every acquisition requires integration, whether it be management teams only or a true merger combining operations, contracting, and even physical space. Two of a specialty pharmacy’s most important assets are its contracts and its key employees. Careful drafting of contracts, as well as sales force and management team noncompete language, can be crucial to ensuring a smooth transition postacquisition. Specialty pharmacies covet limited distribution drug contracts, lucrative pharmaceutical services relationships, and payer network inclusion, but antiassignment provisions or the other party’s required consent to add pharmacies to the contract reduce the contract’s value in a transaction.
Specialty pharmacies should consider negotiating the ability to assign the contract or add locations without consent, even if just to affiliates, in all valuable contracts. The flip side of assigning contracts is getting out of contractual obligations, such as wholesale prime vendor agreements that duplicate the acquirer’s contracts or otherwise not desirable postclosing. Unilateral “without cause” termination rights are hard to negotiate, which means if a specialty pharmacy gets the right to a without-cause termination, usually the counterparty will get the right, as well. That double-edged sword might not be worth the risk to a specialty pharmacy. Regardless, without-cause termination should be considered in all valuable contracts.
Protecting their industry footprint is also important to buyers, whether it be with key management employees that have the capability to start competing businesses or sales employees with deep relationships with customers. Severance is a fact of life in most acquisitions; therefore, specialty pharmacies should think about noncompete language when hiring. Employees can be asked to sign noncompete agreements as conditions of continued employment posthire, but this creates employee leverage, which can be difficult to navigate in the middle of a transaction. Buyers may insist on certain noncompete agreements as a condition to close the deal, which amplifies employee leverage. The negotiation is even trickier when the employee is a key sales team member or part of management. After all, noncompetes are a delicate topic under the best of circumstances. States vary on what is permitted in these agreements, which adds a layer of complexity. Specialty pharmacies should consider noncompete provisions at the time of hire and the scope of such agreements within the parameters of what will be enforceable under state law and would give a buyer comfort in a transaction.
Being prepared for the diligence process is also key in a smooth transaction and can facilitate integration. Our article in the December 2015 issue of Specialty Pharmacy Times®, “Surviving Diligence: Key Concepts for Specialty Pharmacy Transactions,” provides tips for surviving diligence.
Scaling a business is just as important as integrating it, from a buyer’s perspective. This requires both flexibility and the foundation to make operational changes and increase capacity. For example, a specialty pharmacy may have primarily mail order or retail payer contracts, but to maintain network inclusion at higher volumes, a specialty contract would be required. A specialty pharmacy should understand the eligibility requirements for specialty network inclusion, such as holding multiple accreditations. According to Adam Fein, PhD, in an April 10, 2018, Drug Channels post, 729 unique pharmacy locations were accredited with the 3 major independent accreditation organizations at the end of 2017—almost double the 2015 number. Clearly, accreditation should be high on the priority list. If it is not feasible to pursue the accreditations, the specialty pharmacy should be mindful of the criteria and work toward meeting those—and certainly not take acts that might impede accreditation.
A specialty pharmacy can also take other acts to further scalability. For example, consider adjacent space when negotiating leases, and try to lock in price or negotiate volume discounts for future volume increases when negotiating vendor agreements. Push chief operating officers and operations management to be thoughtful and creative in developing teams and business flows. Connectivity among remote pharmacies can be key for allocating additional volume to a certain pharmacy.
A solid platform is a key component of being a valuable asset. This includes 50-state licensures free of any material unresolved disciplinary actions or limitations, broad payer coverage, strong relationships with drug manufacturers, and a robust compliance program. Certain state Medicaid programs require a pharmacy to have a brick-and-mortar presence in the state or an adjacent state; know and capitalize on those opportunities. Just as important as a strong platform is the ability to communicate and document capabilities. Documents of internal audits, compliance committee meetings, and management meetings can be pivotal in demonstrating capabilities. Clear and accurate financial documents also are essential. Often, a buyer is more concerned with a precise understanding of the specialty pharmacy’s platform than with the components of platform itself. To a buyer, understanding the asset is fundamental.
Whether it is a pharmacy or a private equity investor that is in the process of acquiring assets, buyers must anticipate and plan for either going to market in the future or spinning off discrete assets. They should be mindful of corporate structure and asset allocation during the purchase process. In addition, buyers should share their long-term strategy with their corporate and regulating legal counsel, asking for guidance on tax implications and structures that make selling business lines easier.