Incorporated: 1985 as Genesis Health Ventures, Inc.
Sales: $1.44 billion (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: NCRX
NAIC: 422210 Drugs and Druggists' Sundries Wholesalers; 446110 Pharmacies and Drug Stores; 423450 Medical, Dental, and Hospital Equipment and Supplies Merchant Wholesalers
NeighborCare, Inc. is one of the largest providers of institutional pharmacy services in the United States. The company serves long-term-care facilities in 32 states and the District of Columbia that collectively have approximately 260,000 beds. These facilities include long-term-care and skilled nursing facilities, specialty hospitals, assisted and independent living communities, and other group settings. NeighborCare's pharmacy operations include 62 institutional pharmacies, 32 community-based professional retail pharmacies, and 20 onsite pharmacies that are located in customers' facilities. In addition, the company runs 16 home infusion, respiratory, and home medical equipment distribution centers.
NeighborCare was known as Genesis Health Ventures, Inc. from its founding in 1985 through November 2003, during which time the company was also a provider of integrated healthcare services through nursing homes and assisted-living facilities. The latter business was spun off into a public company called Genesis HealthCare Corporation in December 2003, at which point the firm adopted the name NeighborCare, Inc. and began concentrating solely on institutional pharmacy services.
Innovations in Senior Care in the 1980s
Michael R. Walker and Richard R. Howard were already veterans of the nursing home industry when they founded Genesis Health Ventures, Inc. in 1985. They had worked together since the 1970s, building up two $100 million nursing home chains, as well as their own reputations in the industry. When these chains were bought up by industry heavyweights Beverly Enterprises and HCR, Inc., Walker and Howard decided to go into business for themselves, setting up operations in an old furniture and dry goods store in the small town of Kennett Square outside Philadelphia. Their reputations served them well. On the first day of operation, the company was able to arrange some $32 million in loans.
Setting out to build a nursing home chain with a difference, Walker and Howard used these loans to purchase nursing home facilities in Connecticut and southwestern Massachusetts. At the time, the prevailing culture among nursing homes was to provide long-term custodial care, typically on a fee-for-service basis. Walker and Howard, however, looked toward building a health services network, focused on providing geriatric care, that would emphasize rehabilitative services. "No one wants to end up in a nursing home," Walker told Institutional Investor, and that belief provided the cornerstone for the company's growth. Through rehabilitative therapy and services, patients were encouraged to return home—or to less care-intensive facilities—and to independent lives. Genesis offered a program of clinical intervention and managed care that emphasized the restoration of functional ability. This, the company reasoned, would be good for its patients, and for its bottom line. The typical nursing home was expensive to operate, and long-term care provided only low profit margins.
Managed care was still relatively unknown in the healthcare industry, and nearly unheard of in the geriatric market. However, the projected growth of the elderly population, with forecasts of 35 million by the end of the century and nearly 60 million by the year 2025, signaled the need to control costs among the very population most in need of medical services. From the start, Genesis set out to control its own costs. Rather than contracting out for its network support services, such as pharmacy services, home medical equipment, and rehabilitation therapy, the company instead focused on acquiring these services and their higher profit margins. As clients were discharged from the company's nursing homes, they could be retained within the company's network of other services. In 1986 Genesis made the first of many acquisitions, acquiring the Speech & Hearing Network, which was renamed Team Rehabilitation.
By 1990 the company had more than 30 facilities in its network, with 4,500 long-term beds, generating revenues of nearly $145 million. Genesis continued to expand its services network through carefully planned acquisitions. One important consideration was a proposed acquisition's proximity to other facilities in the company's managed care network. "If you own a pharmacy in Pennsylvania and a nursing home in North Carolina, you can't share information," Walker told the Baltimore Sun, "But if I have a pharmacy, a physical therapist, a physician in the same place, guess what? They can all get together once a week to discuss the patient's health and get that person out of long-term care."
Genesis next moved to expand into pharmacy and medical supply services—where profit margins ranged from 10 to 15 percent as opposed to the 3 to 5 percent available on nursing homes—acquiring Accredited Surgical Companies, Inc. and Drug Lane Pharmacies, Inc., both of which repackaged and sold drugs. The two companies were combined to form the ASCO Healthcare, Inc. subsidiary, which was expanded into a full-service medical supply company that supplied not only the Genesis network, but outside nursing homes as well. Genesis also expanded its business by entering a management agreement for providing life-care services at continuous-care retirement centers, and by opening a physician-staffed outpatient clinic.
Growth in the Early to Mid-1990s
Genesis went public in 1991, selling 1.8 million shares and raising $13.5 million, which the company used to pay down some $12.6 million in debt. By then, Genesis operated 42 geriatric-care facilities, managed 13 life-care communities, and held service contracts with more than 140 independent healthcare providers. The company continued to pursue acquisitions, purchasing Concord Healthcare Corp. and Total Care Systems, which helped boost the company's revenues to $171.5 million for its 1991 fiscal year. Genesis, which had been profitable since its formation, posted net income of nearly $3.3 million for the year. Genesis also took another step toward completing its network by developing a subsidiary called Physician Services. This addition allowed Genesis to become the first and only company in its industry to employ its own primary care physicians for its customers.
The following year, the ASCO subsidiary expanded, acquiring Suburban Medical Services for $9 million. The company opened a second rehabilitative outpatient clinic in order to serve customers discharged from its nursing homes; at the same time, the company moved to extend its services with the construction of an assisted-living facility located next to its geriatric facility in Wilkes-Barre, Pennsylvania. At the end of 1992, Genesis posted a second public offering, of 2.5 million shares at $13 per share, setting the stage for the next phase in the company's growth. By then, the company's revenues neared $200 million, while net profits climbed to $7.4 million.
The next year, 1993, proved to be pivotal in the company's development. Genesis expanded its ASCO subsidiary with the purchase of a home healthcare company and the acquisition of Health Concepts and Services, Inc., a provider of nursing home staff training and services based in Baltimore. By then, ASCO's revenues had climbed to $80 million, with 80 percent of those sales coming from outside the Genesis network. Within Genesis, the company established its Functional Evaluation & Treatment Unit, later known as the Full Potential process. This unit provided a geriatric assessment program for evaluating and placing patients. Based on physician-directed teams including registered nurses; nurse practitioners; physical, occupational, recreational, and speech therapists; social workers; and dietitians, the unit worked with patients and their families, as well as community and network resources, to develop realistic rehabilitation goals and care plans designed to achieve those goals.
Until 1993, Genesis's emphasis had been on expanding the scope of its network services; however, calls for healthcare reform from the newly inaugurated Clinton administration led Genesis to shift its focus. One expected consequence of healthcare reforms in general—and the inevitable reforms to the Medicare/Medicaid system for the company's core geriatric clients—would be abolition of the old fee-for-service healthcare plans in favor of prepaid, bulk rate plans. With competition for prepayments expected to be intense, Genesis moved to create a critical mass of nursing homes and geriatric facilities that would enable it to compete more strongly for contracts, especially government contracts. In October 1993, the company announced the largest acquisition in its history, with the $205 million purchase of Meridian Healthcare, the largest nursing home operator in Maryland. Genesis added Meridian's 36 geriatric-care facilities to the 58 already in the company's network, nearly doubling its revenues, from $220 million in 1993 to nearly $400 million in 1994. Maryland then became the company's largest market, surpassing Massachusetts. The Meridian acquisition also meant that Genesis would be able to expand its range of services into Maryland, where Genesis was by then the state's largest senior care provider, controlling costs by achieving economies of scale.
Over the years, NeighborCare's success has stemmed from our core philosophy of providing the highest quality health care services in the marketplace. Delivering pharmacy, infusion, medical supplies and equipment, oxygen, respiratory medications, services and more, in the most cost effective way and in a clinically appropriate manner, is the NeighborCare trademark. This strategy is further enhanced by NeighborCare's ability to provide care across a variety of settings from home to long term care, from the physician's office to an assisted living facility or to our customers in retail pharmacies.
The Meridian acquisition was the first in a flurry of new acquisitions. In a move to expand into the burgeoning home healthcare market, Genesis purchased a 14 percent share in a partnership corporation acquiring Baltimore's Visiting Nurse Association. The company also entered a strategic alliance with Horizon Healthcare to provide pharmacy services in the New England region. By 1995, the company had successfully absorbed Meridian's operations under the Genesis banner, gaining recognition as well for its policy of maintaining both existing management and staff, ensuring continuity of client care. This policy served the company well as it sought further acquisitions.
After acquiring Pennsylvania-based TherapyCare Systems LP for $7 million in April 1995, Genesis, through ASCO, bolstered its home healthcare business in June of that year with the $2 million acquisition of Baltimore-based Eastern Medical Supplies, Inc., and that company's Eastern Rehab Services, Inc., affiliate. The new acquisitions, which generated about $3.5 million in annual revenues through the sale and rental of home medical equipment and respiratory rehabilitation equipment, provided Genesis with increased access to the home health market through hospital affiliations, hospice contracts, and two retail stores. Helping to fuel the company's expansion was a new public offering that raised nearly $52 million, enabling Genesis to pay down debt associated with the Meridian acquisition.
By August 1995, Genesis announced its next large acquisition, agreeing to pay $82.5 million for McKerley Health Care Centers, the largest nursing home chain in New Hampshire. A principal factor in the family-owned chain's decision to sell to Genesis was the company's treatment of its Meridian employees: All of that company's managers, executives, and staff had kept their jobs, while new jobs had been created, and two of Meridian's executives had been promoted to key executive positions within Genesis itself. The acquisition of McKerley added 15 owned or leased geriatric care facilities, with 1,500 beds and some 1,500 employees.
At the beginning of 1996, with 1995 revenues of $487 million and net income of nearly $24 million, Genesis made plans to build a new, $16 million, 100,000-square-foot headquarters in Kennett Square. At the same time, the company consolidated its operations, bringing its core businesses under the trademarked brand name Genesis ElderCare. Genesis Health Ventures, Inc., was kept on as the company's legal name, and the name under which it traded on the New York Stock Exchange.
Genesis's acquisition drive continued through 1996. In June the company purchased Baltimore-based NeighborCare Pharmacies, Inc. for $57.3 million. NeighborCare supplied drugs to nursing homes, operated pharmacies in physician offices, and provided infusion therapy treatments in homes and nursing homes. Genesis subsequently adopted NeighborCare as the name for all of its institutional pharmacy and related services operations. In July 1996 Genesis paid New York-based National Health Care Affiliates, Inc. $133.6 million to acquire 17 elder care facilities in Florida, Virginia, and Connecticut, adding more than 2,500 beds, as well as a rehabilitation therapy business and a nutritional therapy business. In keeping with its focus on its core markets, Genesis also sold several Indiana nursing homes acquired through its Meridian purchase.
In October 1996 Genesis made its largest acquisition to date, paying $223 million to acquire Geriatric & Medical Companies, Inc., which, with 27 nursing homes, added another 3,500 beds to Genesis's New Jersey and Pennsylvania networks. By the end of its 1996 fiscal year, Genesis had boosted its revenues to $671.5 million and posted net income of $37.2 million.
Genesis added to its nursing home operations in October 1997 when it joined with two investment boutiques, Cypress Group and Texas Pacific Group, to acquire the Multicare Companies, in a $1.4 billion deal. Genesis took a 42 percent stake in the acquired company, based in Hackensack, New Jersey. Multicare operated 155 nursing homes throughout the northeastern United States with 16,000 beds, which gave Genesis a total of more than 38,000 beds, making it one of the three or four largest owner/managers of nursing homes in the country.
Michael R. Walker and Richard R. Howard found Genesis Health Ventures, Inc. to build a nursing home chain.
Company expands into pharmacy and medical supply services through acquisitions of Accredited Surgical Companies, Inc. and Drug Lane Pharmacies, Inc., which were combined to form ASCO Healthcare, Inc.
Genesis goes public.
Meridian Healthcare, the largest nursing home operator in Maryland, is acquired.
Genesis acquires Baltimore-based NeighborCare Pharmacies, Inc. and Geriatric & Medical Companies, Inc., operator of 27 nursing homes in New Jersey and Pennsylvania; Genesis's institutional pharmacy and related services operations subsequently begin operating under the NeighborCare name.
Genesis joins with two investment boutiques to acquire the Multicare Companies, operator of 155 nursing homes in the northeastern United States.
Multicare's Scotchwood Services is integrated into NeighborCare, and NeighborCare also acquires Vitalink Pharmacy Service, Inc.
Cuts in Medicare payments lead to huge losses and bankruptcy filing for both Genesis and Multicare.
Genesis emerges from bankruptcy, having merged with Multicare.
Elder care operations are spun off to shareholders as separate company, Genesis HealthCare Corporation; the company, now focused exclusively on institutional pharmacy services, changes its name to NeighborCare, Inc.
Omnicare, Inc. launches a hostile takeover of NeighborCare.
Multicare also owned Edison, New Jersey-based Scotchwood Services, provider of long-term-care pharmacy, infusion therapy, and consulting services in seven states. In early 1998 Scotchwood was integrated into NeighborCare, extending the latter's reach to 13 states, including four new ones: Illinois, Ohio, West Virginia, and Wisconsin. NeighborCare grew still larger through the August 1998 acquisition of Vitalink Pharmacy Service, Inc. for $594.2 million in cash and stock and the assumption of $90 million in debt. Following the integration of Vitalink, NeighborCare operated more than 100 institutional and retail pharmacies in 25 states, from Florida to New England as well as in the Midwest and on the West Coast. The combined operations had annual revenue of approximately $900 million—about half of parent company Genesis's overall revenues.
Bankruptcy Under Weight of Medicare Cutbacks: 2000–01
In July 1998 Medicare began implementing a change in the way it paid nursing homes and other long-term-care facilities that was mandated in the federal Balanced Budget Act of 1997. In place of the old system that reimbursed providers for actual costs incurred, the new system paid facilities per-diem rates based on the basic level of care a patient required. Genesis began feeling the effects of the Medicare cutbacks in fiscal 1998, when it posted a net loss of $24.2 million on revenue of $1.41 billion. The following year was even worse: $270.6 million in the red on revenue of $1.87 billion. In June 2000 both Genesis and Multicare joined a wave of industry bankruptcies when they filed for Chapter 11 protection under a $1.5 billion debt load.
In October 2001 Genesis emerged from bankruptcy through a reorganization plan in which it merged with Multicare. The companies' bank lenders received about $220 million in cash, $242.6 million in senior notes, about 93 percent of the new common stock, and about $40 million in preferred stock. Unsecured creditors got about 7 percent of the new common stock, while the previous common stockholders of the companies, as is typical in Chapter 11 reorganization plans, received nothing. The companies' nursing homes continued to operate throughout the bankruptcy.
Company Split, Emergence of NeighborCare: 2003
In May 2002 cofounder Walker stepped down as CEO in order to focus full-time on lobbying the U.S. government to better fund long-term care. Robert H. Fish, a board member and a partner in a California healthcare consulting firm, was named interim CEO. Fish announced two months later that Genesis had agreed to acquire Cleveland-based NCS Healthcare Inc., the fourth largest institutional pharmacy provider in the country, for about $346 million in stock and assumed debt. The deal would have enabled NeighborCare to move from third to second place in the industry. But Omnicare, Inc., the number one institutional pharmacy provider, stepped in with a much larger offer, and Genesis was forced to end its bid that December.
In the meantime, as this takeover battle was playing itself out, Genesis hired two investment banks to explore the sale or spinoff of its nursing home and assisted living operations in order to focus exclusively on the faster-growing NeighborCare unit. In February 2003 the company announced that it planned to spin off the elder care business to shareholders as a separate publicly traded company. In July, John L. Arlotta came onboard as vice-chairman. Arlotta, with more than 30 years of experience in the pharmacy services industry, had most recently been president and chief operating officer of Carmark Pharmaceutical Services, a leading provider of drug benefit services to health plans, corporations, and insurance companies. On December 1, 2003, Genesis completed the spinoff of its elder care business, which began operating as Genesis HealthCare Corporation. The original Genesis changed its name to NeighborCare, Inc., with corporate headquarters in Baltimore. Arlotta took over leadership of NeighborCare as chairman and CEO.
NeighborCare had barely completed this separation when Omnicare stepped forward with an unsolicited takeover bid. Late in March, Omnicare made a private approach about a takeover but was quickly rebuffed. The firm then took its bid public two months later, offering $30 per share for NeighborCare, a substantial premium over what the stock had been trading for and amounting to a $1.5 billion bid. NeighborCare blasted the proposed transaction as "blatantly opportunistic" and rejected the approach again, prompting Omnicare to turn hostile with a tender offer. NeighborCare continued to oppose the takeover, calling the offer financially inadequate and insisting that shareholders would be better off allowing the company's operational plan to go forward. Into late 2004, Omnicare extended the deadline for its tender offer several times as the Federal Trade Commission (FTC) reviewed the deal to determine whether it was permissible under antitrust laws. How the FTC ruled was expected to play a major role in whether the deal moved forward.
Accumed, Inc.; ASCO Healthcare, Inc.; CareCard, Inc.; Concord Pharmacy Services, Inc.; Delco Apothecary, Inc.; Eastern Medical Supplies, Inc.; Encare of Massachusetts, Inc.; Horizon Medical Equipment and Supply, Inc.; Institutional Health Care Services, Inc.; The Medical Centre, LLC; Medical Services Group, Inc.; NeighborCare Pharmacies, Inc.; Professional Pharmacy Services, Inc.; Quest Total Care Pharmacy.
Omnicare, Inc.; PharMerica, Inc.
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Atkinson, Bill, "Baltimore's NeighborCare Urges Shareholders to Reject Rival's Buyout Offer," Baltimore Sun, June 16, 2004.
—, "NeighborCare to Be Bought by Pa. Chain," Baltimore Sun, April 23, 1996, p. 1C.
Berman, Dennis K., "Omnicare Makes $1.5 Billion Bid to Acquire Rival NeighborCare," Wall Street Journal, May 25, 2004, p. C5.
Brin, Dinah Wisenberg, "Omnicare Shows Its Hunger to Grow," Wall Street Journal, July 21, 2004.
Brooke, Bob, "Genesis Project Marks New Beginning for Downtown," Philadelphia Business Journal, January 12, 1996, p. 23.
Fahey, Tom, "McKerley Sought Sale," Union Leader, August 23, 1996.
"Genesis Health Ventures," Institutional Investor, July 1994, p. S22.
George, John, "Elder Care Network Part of Genesis Plan," Philadelphia Business Journal, October 10, 1997, pp. B2, B10.
—, "Genesis Nursing $30 Million Shortfall," Philadelphia Business Journal, March 19, 1999, pp. 1+.
Goldstein, Josh, "One of Nation's Biggest Nursing Home Operators to Break into Two Companies," Philadelphia Inquirer, February 13, 2003.
—, "Pennsylvania's Genesis Health Ventures to Split Nursing Home, Pharmacy Units," Philadelphia Inquirer, December 1, 2003.
—, "Philadelphia-Area Nursing-Home Chain's CEO Resigns," Philadelphia Inquirer, May 29, 2002.
Jones, John A., "Genesis Expands Geriatric Network by Acquiring Meridian," Investor's Business Daily, March 28, 1994, p. 40.
—, "Genesis Health Is Set up to Manage Care for the Elderly," Investor's Business Daily, February 12, 1996, p. A33.
Mehta, Stephanie N., "Genesis Health to Acquire Vitalink for $594.2 Million in Cash, Stock," Wall Street Journal, April 28, 1998, p. B4.
Meisol, Patrick, "With Acquisition of Meridian, Genesis Health Nears Goal of Regional Domination," Baltimore Sun, October 3, 1993.
Pallarito, Karen, "CFO's Creative Solutions Win Cain Bros. Award," Modern Healthcare, September 9, 1996, p. 44.
Salganik, M. William, "Baltimore Pharmaceutical Supplier NeighborCare Posts Loss in Fighting Buyout," Baltimore Sun, August 5, 2004.
—, "Pharmacy Chain to Spin Off from Parent, Find Base in Baltimore," Baltimore Sun, November 18, 2003.
Saphir, Ann, "Genesis Joins Rush to Bankruptcy," Modern Healthcare, June 26, 2000, p. 8.
Vincent, Dale, "McKerley Health Care Chain Sold for $82.5M," Union Leader, August 22, 1995, p. A1.
—update: David E. Salamie