“Bankruptcy” is becoming an all-too-familiar word in the pharmacy world.
CVS subsidiary Omnicare, which provides pharmacy services to long-term care facilities, filed for Chapter 11 bankruptcy protection on Sept. 22. The move comes a couple months after a judge ordered Omnicare to pay roughly $949 million in penalties for allegedly overcharging Medicare, Medicaid, and Tricare (the federal insurer for the military) for prescription drugs.
It also comes a few months after pharmacy chain Rite Aid filed its second Chapter 11 bankruptcy petition.
David Azzolina, Omnicare’s president, said in a press release announcing the bankruptcy filing that the penalty was “extreme” and potentially “unconstitutional.”
“Omnicare has been engaged in a civil lawsuit alleging technical violations of pharmacy law based on practices the government knew about and approved,” Azzolina said. “There were no allegations of harm to any Omnicare patients nor did the government allege that any patient got anything other than the medicine they needed when they needed it.”
Diving deeper. Rohan Kulkarni, executive research leader for business consultancy HFS Research, told Healthcare Brew Omnicare’s bankruptcy filing didn’t come as a surprise given the size of the penalties the company was ordered to pay.
The bankruptcy likely won’t do much financial damage to CVS, Kulkarni said, as Omnicare makes up only a small portion of the overall company. CVS doesn’t report financial results for Omnicare separately from its other subsidiaries, so the exact percentage is unclear, but based on the market’s reactions to both the lawsuit judgement and the bankruptcy news, Kulkarni estimated Omnicare makes up 3% to 4% of CVS’s total business.
After the judgement was announced, the stock dipped less than 1%, and after the bankruptcy news, the stock increased by about 1%.
However, the move could result in some reputational damage for the company, Kulkarni added.
“Over a period of time, CVS’s decision-making [and] CVS’s performance have indicated that they’re probably not really good at managing and operating a vertically integrated healthcare enterprise,” he said. “We’ve seen their challenges with Aetna. We’ve seen their challenges with some of their other lines of businesses.”
And while CVS executives said in the press release they’re considering selling Omnicare, Kulkarni said they’ll likely only do so when “the dust is settled” since the company’s value would be too low immediately following the bankruptcy news.
Kulkarni also said he expects some layoffs at Omnicare, “or some form of business process reengineering, some leadership shown the door.”
A look at the finances. In its bankruptcy petition, Omnicare listed assets of between $100 million to $500 million and liabilities of $1 billion to $10 billion.
Omnicare executives said in the release that the company has secured $110 million to fund its operations through the bankruptcy process.
“Omnicare remains fully focused on meeting the pharmacy needs of its customers and long-term care residents,” the release stated.
Slavin told Healthcare Brew the company has no additional comment beyond the press release.
Zooming out. Omnicare’s bankruptcy comes after a slew of changes to the retail pharmacy market, including competitor Walgreens selling to private equity firm Sycamore Partners in August.
Retail pharmacies have faced a tough time in the last couple of years amid changing consumer habits, increased competition from nontraditional players like Amazon, and struggling subsidiaries.
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