Transactions involving the purchase and sale of pharmacies and other businesses within the drug supply chain are truly unique. Traditional corporate techniques and form documents are insufficient to address the distinctiveness of these transactions as many elements are particular to a pharmacy or life science transaction, including the myriad of licensing and regulatory considerations. Considerations related to the maintenance of, and compliance with, Pharmacy Benefit Manager (“PBM”) contracts, pharmaceutical wholesaler contracts, and other licenses require particularized attention and knowledge base.
What Types of Pharmacy Transactions Are There?
There are fundamentally two types of pharmacy transactions –an entity purchase (stock purchase where the target is a corporation or membership interest purchase where the target is a limited liability company) or an asset purchase.
An entity purchase involves the acquisition of the stock or membership interests in the target company. This type of transaction generally allows the buyer to succeed to all the benefits of existing contracts, licenses, and accreditations but also exposes the purchaser to pre-closing liabilities, including debt, audit, recoupment, and litigation risk. Typical entity transactions require the seller(s) to indemnify the buyer against such potential liabilities and to place a portion of the purchase price in escrow to provide a source of recovery for these pre-closing liabilities. But in the pharmacy context, the specter of post-closing PBM audits coupled with direct and indirect remuneration (“DIR fees”), which can be several times greater than the actual purchase price, presents an especially high level of risk profile to these types of transactions, as compared to non-pharmacy entity purchases and sales.
The second type of transaction is an asset purchase where the purchaser acquires only the assets of the target pharmacy, requiring the purchaser to form a new entity to own the pharmacy assets and file for new state pharmacy licenses, payer (PBM) contracts, DEA registration, and a variety of other credentials required to operate the pharmacy. However, there can be a gap between the closing of an asset purchase and the issuance of new licenses and contracts to the purchaser. In order to allow the pharmacy to continue to operate and maintain its customer base during that gap period, many states permit the buyer to operate the pharmacy utilizing the seller’s contracts and licenses pursuant to a power of attorney agreement. However, the seller should be aware that it may be at risk of adverse consequences should the buyer engage in misconduct during the gap period.
Change of Ownership Requirements for Pharmacies
The change of ownership requirements for pharmacies further complicates stock and membership interest transactions. Each state has its own requirements for reporting change of ownership to the applicable licensing authority. Some states require 30-days notice prior to closing, while others even require submission of the actual transactional documents pre-closing. Other states, however, have simple post-closing notification requirements. Additionally, PBMs have their own notification and recredentialling requirements contained in PBM contracts. These factors mandate a transactional attorney who understands the licensing and contracting process and is able to craft documents that conform to all of the PBM contracts and state laws under which the pharmacy operates.
Unique Experience Representing Pharmacies in Transactions
Frier Levitt has represented clients in pharmacy transactions that range from smaller sales of distressed pharmacies to large chains such as CVS and Walgreens, to several hundred million dollars purchases by private equity, and all forms of transactions in between. Our knowledge and experience allow us to assist our clients in selecting the most suitable transaction model and navigating them through the complex deal process in an efficient and cost-effective manner.
Some of the legal guidance that we provide includes:
Our attorneys have unique backgrounds that are often necessary in the due diligence process. As part of due diligence, the acquiring entity desires to identify all financial and legal risks of the acquisition. Often times the risks in a pharmacy acquisition have nothing to do with traditional business principles, rather are more connected to the unique attributes of the PBM relationship. One such example is the specter of post-closing anticipated changes in reimbursement rates, inventory audits, PBM recoupment of DIR fees, a business model that is not compliant with state law, federal law or the PBM manual. Our attorneys have helped Private Equity companies avoid bad deals and renegotiate terms as a result of our proprietary due diligence.
Once again, in the life sciences space, the corporate governing documents created by even excellent corporate attorneys for traditional corporate transactions are insufficient. Corporate governance documents in the life sciences industry require unique terms and conditions that reflect some of the principles and risks inherent in the space.
Whether you are a buyer or a seller of a pharmacy, the transaction documents require specialized expertise. Frier Levitt attorneys have substantial experience understanding PBM relationships, relationships with HUB models involving prescription referrals, prescriber relationships, GPO and wholesaler relationships, data transactions and manufacture rebate arrangements. Each of these concepts and many more must be built into and considered in transactional documents.
Very often traditional bankers will avoid lending into the Pharmacy space. An experienced healthcare and life sciences attorney can provide substantial guidance and due diligence assistance that can ease the underwriting process. As with every other issue described above, borrowers need to understand the unique relationship between a pharmacy and all of the various stakeholders in order to understand the risks of funding.
As described above, the acquiring entity is faced with a maze of state and federal regulatory laws that must be addressed in the post-closing days, months, and even years. Failure to comply with post-closing regulatory compliance can result in network termination by PBM’s or other payers, as well as loss of license.
Nowhere is the exposure of the acquiring entity more notable than in change of ownership issues. Acquiring entities face challenges from PBMs, state boards as well as Medicare and Medicaid. It is absolutely critical to the transaction process for the acquiring entity to be aware of change of ownership processes and risks, in order to complete the process.
An often underappreciated aspect of a pharmacy purchase and sale transaction is the need to assume an existing lease, negotiate a new lease with the landlord, or negotiate a lease with a seller who owns – and is retaining – the building where the pharmacy is located. Alternatively, the seller may own the building and is selling it as part of the overall transaction. In either event, making sure that the business has a stable long term location on favorable terms following the closing is essential.
How Frier Levitt Can Help
Our attorneys have worked exclusively in the healthcare industry for the last 25 years and have the unique experience and specialized knowledge in understanding the elements of pharmacy and life science transactions including the myriad of licensing and regulatory consideration, and the management of Pharmacy Benefit Manager (“PBM”) contracts, as well as extensive experience in related real estate transactions.
Frier Levitt provides strategic, industry-focused legal counsel tailored to your needs. Contact our team today to learn how we can help you.
