Wednesday, February 19, 2020

Specialty Pharmacy M&A in 2019: CVS, OptumRx, and Private Equity Highlight a Slowing Market

Specialty pharmacy is losing some of its sizzle.

Below you’ll find our list of ten deals from last year, along with trends since 2014. Our analyses show that merger and acquisition activity is down sharply from its 2016 peak.

Some highlights:
  • Pharmacy benefit managers (PBMs) were busy again. CVS Health bought two more specialty pharmacies. OptumRx bought one-time industry leader Diplomat Pharmacy.
  • Private equity firms continued to invest in specialty pharmacy, but deals seem to be smaller and more focused.
Go-go growth and a vibrant M&A market look like distant memories. Fewer new specialty pharmacies are starting up, the two biggest companies have been acquired, and market share continues to concentrate with the PBM-owned specialty pharmacies. This is your wake up call.

LET’S MAKE A DEAL

Market changes in the specialty pharmacy industry have slowed the buying and selling of specialty pharmacy and infusion services companies. This chart illustrates research by the Braff Group and Drug Channels Institute on the number of M&A transactions since 2014.

[Click to Enlarge]

As you can see, there were 10 specialty pharmacy transactions in 2019, compared with 20 transactions in 2016. The slowdown is due partly to a decline in activity by serial acquirers. Many of these companies have slowed acquisition activity (e.g., Walgreens) or been acquired themselves (e.g., Diplomat Pharmacy). The challenges facing smaller pharmacies over the past few years have also limited the supply of viable acquisition targets of sufficient scale.

The following 10 transactions were publicly announced in 2019. They are listed alphabetically by the acquirer’s name. Please email me if you spot any omissions.
  • Consonance Capital Partners, a private equity firms, acquired Orsini Pharmaceutical Services, a specialty pharmacy based in Illinois.
  • Court Square Capital Partners, a private equity firm, acquired KnippeRx, an independent specialty pharmacy that is part of J. Knipper and Company.
  • CVS Health made five specialty pharmacy acquisitions in 2018. In 2019, it made two additional acquisitions:
    • ProCare Pharmacy, L.L.C., a subsidiary of CVS Health, acquired the Commcare specialty pharmacy from Premier, one of the largest hospital GPOs. Commcare’s 2019 annual revenues were $460 million.
    • Encompass Rx, a specialty pharmacy acquired by CVS Health in 2018, acquired MsRX, a small specialty pharmacy based in Georgia. 
  • Kinderhook Industries, a private equity firm, made two acquisitions:
    • Long’s Drugs, a retail and specialty pharmacy. Long's operates Avita Pharmacy, which it had acquired in 2016, and Longs Specialty Pharmacy.
    • PharMedQuest, a specialty pharmacy and specialty drugs services company that focuses on 340B covered entities.
  • SMP Pharmacy Solutions acquired Northridge Plaza Pharmacy, a pharmacy that focused on fertility products. In 2018, SMP itself had been acquired by Galen Partners, a private equity firm.
  • St. Cloud Capital, a private equity firm, acquired a majority interest in AleraCare Holdings. AleraCare is the combination of three companies: MedicoRx Specialty Pharmacy, Vasco Infusion, and VascoRx Specialty Pharmacy.
  • UnitedHealth Group’s OptumRx announced its acquisition of Diplomat Pharmacy, which had been the largest publicly-traded specialty pharmacy and infusion services business. Diplomat Pharmacy had been one of the most active acquirers prior to 2018. The transaction was finalized in February 2020.

    Note that in 2018, OptumRx acquired Avella Specialty Pharmacy, which had been the second-largest independent specialty pharmacy, and Genoa Healthcare, which had a significant specialty business.
  • Village Fertility Pharmacy acquired Integrity Rx Specialty Pharmacy, which focuses on fertility products. In 2016, Village itself had been acquired by BelHealth Investment Partners.
There were also two notable transaction that relate to specialty pharmacy and the 340B Drug Pricing Program:
  • Cigna’s Express Scripts business acquired Verity Solutions, a private 340B contract pharmacy split-billing and services business. (I noted this transaction in the October news roundup)
We’ll have a complete update on the state of specialty pharmacy in our forthcoming 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, which will be available on March 10. The new report is available for preorder now.

In the meantime, you can review our ever shrinking list of high growth pharmacies in The Shakeout Begins: The Fastest-Growing, Private Specialty Pharmacies of 2018 and wonder what happened.

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