Pharmacy transactions and other transactions within the drug supply chain are truly unique. Traditional corporate techniques and form documents are insufficient to address the uniqueness of these transactions. Many elements particular to a pharmacy or life science transaction including the myriad of licensing and regulatory consideration, and the management of Pharmacy Benefit Manager (“PBM”) contracts require particularized attention and knowledge base.
What Types of Pharmacy Transactions Are There?
There are fundamentally two types of pharmacy transactions, stock purchase (or membership interest purchase agreement in the context of a limited liability company) or an asset purchase. A stock purchase involves the actual acquisition of the stock in the company. This type of transaction allows the buyer to enjoy 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 stock transactions require funds to be placed in escrow to account 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, present a new level of risk profile to these types of transactions. The second type of transaction is an asset purchase where the purchaser acquires only the assets of the pharmacy, requiring the purchaser to file for new state pharmacy licenses, payer contracts, DEA registration, and a variety of other credentials required to operate the pharmacy.
Change of Ownership Requirements for Pharmacies
The change of ownership requirements for pharmacies further complicates stock transactions. Each state has its own unique 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 unique notification and recredentialling requirements contained in PBM contracts. These factors mandate a transactional attorney who understands the licensing process and is able to craft documents that conform to all of the PBM contracts and state laws in which the pharmacy operates.
Unique Experience Representing Pharmacies in Transactions
Frier Levitt has represented clients in pharmacy transactions that range from $30,000 sales of distressed pharmacies to 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 efficient and cost-effective manner.
Some of the legal guidance that we provide includes:
- Strategic business planning.
- Creation and execution of due diligence process. 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, but 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, BM 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.
- Formation of governance documents. 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.
- Drafting of transactional documents. Whether you are a buyer or a seller of a pharmacy, the transaction documents require unique 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 the transactional documents.
- Assistance with acquiring funding. 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.
- Post-Closing regulatory compliance. 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.
- Change of ownership filings with licensing authorities and third-party payors. 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.
How Frier Levitt Can Help Pharmacies with Buying, Selling, and Other Transactions
Our attorneys have worked exclusively in the healthcare industry for the last 20 year’s and have the unique experience and specialized knowledge in understanding the elements of pharmacy and life science transaction including the myriad of licensing and regulatory consideration, and the management of Pharmacy Benefit Manager (“PBM”) contracts. Contact us today to speak to someone from our pharmacy transactions team.