Friday, March 23, 2007
In 1987, the U.S. government created one of the largest and most profitable drug networks in the country... nearly overnight.
As the nursing-home industry took off in the mid-1980s, it couldn't find enough qualified personnel to take care of the new patients. Inevitably, horror stories began popping up in the news about substandard care provided by under-qualified and unskilled workers.
The biggest problems involved errors with prescription drugs. Folks were dying for either taking the wrong drugs, or not getting the right medicines at all.
In response, the Nursing Home Reform Act required that a pharmacist monitor all drug regimens for every patient in an extended-care facility. With the new law, a new crop of drug wholesaler businesses sprouted up.
Drug wholesalers claim to reduce costs while preventing deadly medical errors. For example, by monitoring the prescriptions that flow through nursing homes, wholesalers can encourage the use of generic drugs where appropriate... and reduce the number of redundant prescriptions. Moreover, they often demand bulk discounts and other rebates from drug companies for their customers, after taking their slice of the pie, of course.
The whole industry is built around delivering medicines from drugmakers directly to the elderly patients that need them. The companies essentially serve as middlemen.
Of these new middlemen, one emerged to dominate the industry – Omnicare Inc. (OCR).
Omnicare grew to be the best and biggest through an active acquisition strategy, scooping up dozens of mom-and-pop pharmacies that served regional nursing homes. In the process, Omnicare became one of the great stock stories of the '90s... gaining more than 1,800% during the decade. Even now, the company continues to offer superior profit margins compared to industry standards.
Today, Omnicare fetches roughly $5 billion annually for the lion's share of nursing-home market. It essentially acts as pharmacy for 1.4 million nursing home beds – nearly half of the entire market. As The Wall Street Journal recently highlighted, "Whenever someone in a nursing home takes a pill, chances are good that Omnicare Inc. had a hand in dispensing the medicine."
But things have changed a bit from the boom times for the Omnicares of the world. Now, Medicare, not Medicaid, floats many of the medical bills for seniors. And Medicare's new "Part D" prescription drug coverage has altered the way drug middlemen are paid, as well as introduced competition from a host insurance companies. As a result, the stock prices of many of these drug middlemen, including Omnicare, have deflated over the last year or so.
From my vantage point, this situation creates great bargain-shopping opportunities for some of the bigger names. We're also seeing several new players with innovative business models emerge in the industry. After all, the "drugs-to-nursing homes" business can only get larger.
I'm busy digging through the drug wholesaler sector, along with several other facets of the health-care industry. I've located some amazing investment opportunities, and I'll continue to share them with you in the future.
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