A Legal Checklist for New Pharmacy Owners

When looking to purchase a pharmacy, prospective owners must take into consideration multiple aspects of the transaction in order to ensure a successful continuation of operations post-closing. Failure to properly evaluate, structure, and execute a transaction can result in reduction of revenues, loss of payer contracts, or even revocation of pharmacy licenses. The items discussed herein do not represent an exhaustive closing list of items that must be undertaken, but they do warrant the attention of both first-time and experienced buyers.

1. Asset Purchase Agreement vs. Stock Purchase Agreement

The first, and perhaps most important, decision that a buyer must make is what type of transaction should take place. There are essentially 2 types of pharmacy transactions for operational pharmacies: an asset purchase or a stock purchase.

An asset purchase occurs when the buyer acquires only the assets of a pharmacy. A purchaser may choose to acquire pharmacy assets using another existing pharmacy, or the purchaser may seek to establish a new pharmacy once it has acquired these assets. Pharmacy licenses and third-party payer agreements are not transferrable in an asset sale. Accordingly, these sales require the buyer to apply for new pharmacy licenses, payer contracts, and a variety of other credentials required to operate the pharmacy depending on the payer and/or state specific requirements.

Conversely, a stock or membership interest purchase involves the acquisition of the ownership interest of the existing pharmacy. Unlike an asset purchase, the pharmacy’s corporate form remains intact. This type of transaction provides the benefit of utilizing existing contracts, licenses, and accreditations because the purchaser acquires ownership interest in the existing entity; however, this may expose the buyer to pre-closing liabilities, which can include debts, audits and recoupments, and litigation risk.

Each type of transaction gives rise to different benefits and drawbacks that should be evaluated prior to any purchase.

2. Due Diligence

When acquiring a pharmacy, buyers must review the regulatory, operational and financial risks of the acquisition prior to executing a purchase agreement.  While the due diligence process may seem extensive, it can identify and mitigate risk, allow the purchaser to confirm the condition of the assets or interest subject to purchase, provide insight into the pharmacy’s day-to-day operations, and prevent costly post-closing surprises. Furthermore, as pharmacy transactions involve unique issues, it is important that buyers consult with counsel who have industry expertise in pharmacy transactions and are able to assist with analyzing due diligence materials, including audit results, operating procedures, third party payer and pharmacy benefit manager (PBM) contracts, and specific trends in claim submission to detect any obstacles or risk a buyer may face post-closing.

3. Indemnification, Post-Closing Liabilities, & Contract Terms

Irrespective of whether a purchaser elects to move forward with an asset purchase or stock purchase, the agreement must make clear who will be responsible for post-closing liabilities that may arise. This may include procedures for post-point-of-sale reconciliation fees, audit recoveries, and any issues related to claims dispensed prior to closing. Buyers are encouraged to seek indemnification in purchase agreements to ensure that they have recourse in the event that a pre-closing issue results in liability after acquisition. However, buyers must also be aware that indemnification obligations are only as effective as the seller’s, or indemnifying party’s, ability to pay. If the seller is unable to pay its indemnification obligations, the buyer’s ability to recover will be curtailed. Therefore, in addition to indemnification language, it is also recommended that buyers seek to escrow a portion of the purchase price to cover liabilities that may arise within the escrow period.

4. Change of Ownership Requirements

Each state has its own requirements for pharmacies that undergo a sale and/or a change of ownership. Some boards of pharmacy require simple post-closing notification, whereas others require the submission of a new pharmacy application 30-days prior to closing. In others, as long as the actual entity that holds the pharmacy license will not change, no notification is required. A state board of pharmacy’s processing of an ownership change will directly impact the change notification that must be submitted to the pharmacy’s local Drug Enforcement Administration office. Additionally, many PBMs have unique notification and recredentialling requirements contained in their respective provider agreements. The failure to comply with post-closing notification can result in discipline on the pharmacy’s license, loss of license or registration, and network termination by PBMs or other payers.

Buyers must be aware of the nuances involved in purchasing a pharmacy in order to assess the transaction and limit applicable risk. Both buyers and sellers are encouraged to consult with competent health care counsel to ensure that pre- and post-closing obligations are met.