Vitalink Pharmacy Services, Inc.

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Vitalink Pharmacy Services, Inc.

1250 E. Diehl Road, Suite 208
Naperville, Illinois 60563
U.S.A.
(708) 505-1320
Fax: (708) 505-1319

Public Company
Incorporated: 1967 as TotalCare Pharmacy Services
Employees: 700
Sales: $112 million (1995)
Stock Exchanges: NASDAQ
SICs: 5912 Drug Stores and Proprietary Stores; 8099 Health & Allied Services, Not Elsewhere Classified

Vitalink Pharmacy Services, Inc., provides institutional pharmacy services to nursing facilities and other institutions. Those services include dispensing medications, furnishing infusion therapy products and services, and providing medical supplies and pharmacy consulting. In 1995 Vitalink was the sixth largest institutional pharmacy company in the United States, with 18 pharmacies serving more than 42,000 long-term care beds in 18 states. Vitalink is majority-owned by Manor Care Inc., the company that spun off Vitalink in 1992.

Vitalink Pharmacy Services was the new name given in 1992 to an enterprise known as TotalCare Pharmacy Services. TotalCare had previously operated as the pharmacy services division of two different healthcare companies: Americana Healthcare Corp. and Manor Care Corp. Americana Healthcare, which owned and operated nursing homes, had launched Total-Care in 1967 to serve as its pharmacy services subsidiary. Totalcare effectively provided drugs and related products to patients and residents. During the next several years, Americana slowly grew TotalCare in sync with its other operations. By the early 1980s the TotalCare subsidiary consisted of three pharmacies serving Americana’s chain of 90 nursing homes.

In 1981 Americana Healthcare Corp., along with its Total-Care subsidiary, was purchased by rival Manor Care Inc. Manor Care was incorporated in 1968, about the same time that Americana initiated the TotalCare division. Stewart Bainum, a Marylander and Republican who was active in state politics, had started the company several years earlier when he began investing in real estate, including apartments, hotels, and nursing homes. During his travels, he had become intrigued by Quality Courts, a chain of motels that were known for being extremely clean and neat. He bought a stake in the company and eventually took control of it in 1968. Bainum incorporated Manor Care in the same year to organize his property holdings.

During the 1970s Bainum added several other properties to the Manor Care portfolio. Not until the 1980s, however, did the company’s growth rate surge. Indeed, the 1981 TotalCare buyout reflected a general trend toward consolidation in the healthcare industry that intensified throughout the 1980s. The consolidation was driven by increasing pressures to reduce costs and eliminate waste and overlap. In the case of Manor Care and Americana, for example, operating costs were reduced through various economies of scale. Thus, Manor Care went on to purchase a number of other companies during the decade to become one of the largest hospital and nursing home chains in the world.

Riding on the wave of that growth and benefiting from general industry trends during the decade was the TotalCare Pharmacy subsidiary, which remained intact under Manor Care’s ownership. By the end of the 1980s, TotalCare was generating about $15 million in sales annually. Still, TotalCare remained a relatively meager part of Manor Care’s overall operations. It effectively operated in a protected environment, selling pharmaceutical products to its captive base of Manor Care nursing homes and facilities, and providing related record-keeping services. About 90 percent of its total revenue by the late 1980s, in fact, was derived from its parent company’s operations.

Although TotalCare’s parent, Manor Care, managed to become one of the largest nursing home companies in the country during the 1980s, it wasn’t the most profitable or financially sound. Between 1981 and 1988, Manor Care invested heavily to acquire other businesses and build new facilities. It purchased land at peak prices when interest rates were high and borrowed heavily to fund expansion. The effort allowed Bainum to more than double the company’s size to more than $1 billion in revenues by the late 1980s. When the real estate market crashed in the 1980s, though, Manor Care was hurt. The company became so highly leveraged that its debt became classified as junk.

Stewart Bainum’s son, Stewart Bainum, Jr., had taken over as chief executive of Manor Care shortly before the real estate industry collapse. Like his father, he was active in state politics—but as a Democrat—and had even served two terms in the Maryland General Assembly. During the late 1980s the junior Bainum scrambled to bring Manor Care’s balance sheet under control. He cut costs, brought in new managers, and reorganized and redirected the company’s wide array of holdings (including Totalcare) in an effort to improve profitability and ease the organization’s debt burden. The result was that during the 1990s Manor Care’s return on equity far exceeded the industry norm.

TotalCare Pharmacy was among the many operations that was transformed during the shakeup at Manor Care during the late 1980s and early 1990s. Specifically, Bainum realized that TotalCare was not living up to its potential. Rather than primarily serving Manor Care facilities, he reasoned, the subsidiary could be bringing additional cash flow and profit to the company by using its resources to tap the massive U.S. market for institutional pharmaceutical products and related record keeping services. Importantly, that market was growing rapidly as institutional pharmacies were devouring market share that had previously belonged to retail pharmacists. The retail pharmacists were unable to provide increasingly important consulting and recordkeeping services.

To whip TotalCare into shape and expand it, Manor Care put Donna DeNardo in charge of the unit. DeNardo was a college dropout who had learned bookkeeping skills from her grandmother. She had worked as a nursing home bookkeeper for several years before ending up at Manor Care in 1981. Her performance there earned her a top slot in the reorganized TotalCare unit in December 1989, by which time she was only 37 years old. DeNardo and fellow executives would invest nearly $50 million in the company during the next five years, boosting sales from less than $20 million in the late 1980s to more than $110 million by 1995.

To break out of its comfortable but limiting relationship with Manor Care, TotalCare management knew that it had to aggressively market its services to other institutions. The company hoped to boost the percentage of revenue from outside companies from about ten percent in 1989 to more than 50 percent by the mid-1990s. To that end, it began drawing on Manor Care’s financial resources to acquire other pharmaceutical companies and to develop new locations. That initiative gave it nine branches in six states—Illinois, Indiana, Ohio, Wisconsin, Pennsylvania, and Maryland—by 1991, and boosted the number of nursing home beds under its service from about 7,000 to nearly 12,000.

During 1990 and 1991, TotalCare managed to increase annual sales 48 percent (from $18.4 million to $27.3 million), while net income rose 41 percent to about $3.8 million. The subsidiary, while still a relatively small part of its parent’s operations, was one of Manor Care’s top performers during the two-year period. In 1991, therefore, Manor Care executives decided to capitalize on the subsidiary’s potential by spinning the company off. In March 1992, Manor Care took TotalCare public, incorporating the newly-independent company as Vitalink Pharmacy Services, Inc. DeNardo was named president of Vitalink, while Manor Care’s chief executive, Stewart Bainum Jr., became the company’s chairman.

Manor Care sold 18 percent of its stock in the venture, which brought about $37 million into its coffers. Manor Care used some of the money to pare its heavy debt load. The remaining cash was retained by Vitalink as a war chest for new acquisitions and development. Indeed, at the time of the public offering Vitalink was still garnering well over 75 percent of its sales from facilities owned and operated by Manor Care. DeNardo hoped to quickly reduce that portion using the cash gleaned from the spin-off.

To that end, Vitalink completed a succession of acquisitions during the next several months. In August 1992, Vitalink acquired the assets of Northern Nursing Home Pharmacy, Inc. In December of that year it completed a much larger deal when it paid $25.7 million for the institutional pharmacy and medical supply business of West End Family Pharmacy, Inc. Then, in August 1993, Vitalink acquired White, Mack and Wart, Inc., a Portland, Oregon-based pharmacy company, in a deal valued at roughly $6 million. The important result of those acquisitions, combined with internal growth, was that the number of beds serviced by Vitalink’s operations rose to well over 30,000. Furthermore, more than half of those beds were in institutions not owned by Manor Care.

Vitalink’s sales increased to $40.16 million in 1992 and then to $65.7 million in 1993, while net income rose to $7.34 million (from $2.66 million in 1990 and $5.5 million in 1992). Although the growth seemed impressive, the company’s stock price failed to keep pace. In fact, Vitalink’s stock tumbled as its sales and profits gained. Investor apathy reflected the reality of Vitalink’s situation. Under the Manor Care umbrella, Vitalink had found it relatively easy to secure high profit margins from captive customers. The more it sought outside business, however, the more it was subject to the competitive pressures of the marketplace.

“Unfortunately, our profit margins were probably the highest they’ll ever be a year ago,” said Vitalink’s chief financial officer in the August 13, 1993, Warfield’s Business Record. “The industry average is less than what our experience historically has been, and as we acquire more outside business, our margins will tend to mirror the industry average.” Also squelching profitability for Vitalink in the early 1990s were mounting cost and price pressures inherent to the healthcare industry of the early and mid-1990s. For example, the Clinton administration was pressuring the pharmaceutical industry to ease prices, and managed care organizations were striving to eliminate unnecessary drug-related expenses.

Despite some obstacles, Vitalink continued to aggressively pursue growth going into the mid-1990s and to try capitalizing on marketplace changes. Increasing government regulation, for example, meant that demand for some of its consulting services would likely rise. Similarly, cost pressures were creating a greater demand from Vitalink’s customers for intravenous therapies, which were increasingly being furnished in non-hospital settings. Vitalink was also shifting its focus to the proliferating generic drug segment. It was with those growing markets in mind that Vitalink’s managers continued to acquire competitors and develop new facilities.

In January 1994 Vitalink purchased the institutional pharmacy business of Apothecary Services of Colorado. Similarly, in April 1995 Vitalink acquired the institutional pharmacy business of San Antonio, Texas-based Parker’s Pharmacy, Inc. Shortly thereafter, it bought out Home Intravenous Care Co., a Colorado-based infusion-therapy concern. Those acquisitions helped Vitalink boost sales to $98.57 million in 1994 and then to $112.26 million in 1995. More notably, net income rose to a record high of $11.68 million in 1995, causing the company’s stock price to rally.

By mid-1995, Vitalink was operating 18 pharmacies that were serving a customer network encompassing more than 42,000 beds in 18 states. About 75 percent of its revenue was gleaned from its traditional prescription-management activities, while 16 percent and seven percent, respectively, were garnered from infusion-therapy and medical-supplies operations. Roughly three percent of sales were attributable to consulting services. Vitalink’s dependence on Manor Care had decreased markedly since the early 1990s, although its alliance with the company (which still owned 82 percent of Vitalink) gave it a competitive edge over several of its competitors. With virtually no long-term debt and access to Manor Care’s deep pockets, Vitalink was hoping to boost its rank from the sixth-largest institutional pharmacy operation in the country.