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Family Pharmacy files bankruptcy, seeks sale

The largest creditor in the case is pursuing a buyout

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Family Pharmacy Inc. filed for Chapter 11 bankruptcy protection and is seeking the court’s permission to sell.

The Ozark-based independent pharmacy with 20 locations filed an initial petition for bankruptcy on April 30, citing two years of net losses amounting to $7.5 million.

Jim MacLaughlin, the chief restructuring officer hired for the case, said Smith Drug Co., a division of South Carolina-based J.M. Smith Corp., intends to buy Family Pharmacy from Lynn Morris.

“The company is doing this to preserve itself and maintain its operations and continue to serve its customers,” said MacLaughlin, co-owner of Kansas City-based advisement firm Lloyd & MacLaughlin LLC. “We expect to emerge from this intact, operating under new ownership.”

Morris, who’s also a Missouri state representative for Christian County, could not be reached for comment by press time. On his personal Facebook page, Morris recently indicated he and his wife Janet retired from Family Pharmacy.

Court documents show Family Pharmacy posted net losses of $3.5 million in 2017 and $4 million in 2016, following profits of $686,000 in 2015. Gross revenue dipped to $60.3 million in 2017 from $66.8 million in 2016 and $68.3 million in 2015.

In the initial petition, Family Pharmacy listed estimated liabilities between $10 million and $50 million, the same as its estimated assets.

Officials cited a drop in the number of prescriptions filled to 1 million in 2017 from 1.4 million three years earlier.

“This drop in prescriptions was mostly reflected in the reduced retail prescription revenue,” the court records read. “Nationally, the numbers of prescriptions being filled are down year-over-year.”

Officials also cited increased competition from national pharmacy chains, downward pricing pressure from insurance providers and carriers, cash-flow issues, and “the debtors’ failure to adapt and adjust their business model, overhead and expenses quickly enough to remain profitable,” according to court documents.

Missouri Pharmacy Association CEO Ron Fitzwater said revenues are dropping industrywide for the smaller, independent pharmacy companies.

The root of the issue, Fitzwater said, is pharmacy benefit managers, the third-party operations administering commercial, employer-paid, state and federal drug plans.

“They’re driving small-town, independent, community pharmacies out of business,” he said of the companies, such as Express Scripts, CVS Caremark and Optum, which is now owned by UnitedHealthcare.

“Their negotiation is basically, ‘Here’s a contract. You can be part of our network, or you can pass. The pharmacy down the street will probably sign it, so if you want patients, you have to sign this contract,’” he said. “There’s no negotiation.”

Fitzwater said reimbursements paid to pharmacies to dispense prescriptions – cash flow meant to help cover the costs of brick-and-mortar operations, particularly for smaller, independent companies – fails to make ends meet.

In some cases, he said, the reimbursements have dropped in commercial drug plans to as low as 45 cents per filled prescription, where an equitable reimbursement lands at about $10 per script, as mandated by Medicaid, or higher.

Larger chains, such as CVS or Walgreens, are able to counter the low returns by selling additional merchandise storewide. Independent pharmacies largely lack the cushion.

“Most of my folks are health care providers, like Family Pharmacy or Red Cross [Pharmacy], so 95 percent of their business is selling pharmaceuticals, working with their patients, trying to work with the physicians,” Fitzwater said. “It takes a lot more dollars to provide a service like that. Places like Family Pharmacy can’t compete.”

As a result, Fitzwater said the number of independent pharmacy companies in Missouri has been halved from about 1,000 during the past 15 years.

Recent buyouts include Marshall-based Red Cross Pharmacy Inc. selling its 14 locations, mostly in northern Missouri, to CVS. In March, Pyramid Foods announced it was selling 10 pharmacies to Walgreens, according to past Springfield Business Journal reporting.

“I don’t know what the final fallout is going to be with Family Pharmacy,” Fitzwater said. “I think the goal of Smith Drug is to come in and try to save the chain. Whether they’re able to do it, I’m not sure.”

Smith Drug Co., Family Pharmacy’s primary wholesale pharmaceutical distributor and its largest creditor in the bankruptcy reorganization case, plans to make a stalking horse bid for the company’s assets within 90 days of the petition date.

Smith Drug is owed $18 million, according to the court documents.

Family Pharmacy Vice President Mandy Jones said other companies will have a chance to outbid Smith Drug.

“It’s open for bid,” she said.

Family Pharmacy’s two other primary secured creditors, Bank of Missouri and Cardinal Health, are owed $11 million and $1 million, respectively, according to the court documents.

The records also point to downsizing at Family Pharmacy. Court documents show 182 employees systemwide, which is down from 365 as of May 2017 reported on SBJ’s list of the area’s largest locally owned retail pharmacies. Family Pharmacy ranked first on the list.

Jones, who is Morris’ daughter, confirmed the potential for continued layoffs.

“But I can’t elaborate on that right now,” she said.

According to court documents, Family Pharmacy has 20 retail pharmacies and two long-term care pharmacies, among other assets. The company was founded in 1977.

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