NeighborCare finds success in old-fashioned service

THE BALTIMORE SUN

When Stanton G. Ades and Michael G. Bronfein bought a pharmacy in a shopping center in 1980, their intent was an investment to pay college tuition for their children.

Three years ago, they sold the pharmacy. But not because their partnership failed.

Just the opposite. With 21 pharmacies based near doctors' offices and clinics, as well as a vast network of services to manage and deliver drugs, the original shopping center site just didn't fit into the strategy of the company that grew from it: NeighborCare Pharmacies Inc.

In the past five years, NeighborCare has achieved spectacular growth with a formula that mixed the aura and personal service of a Main Street pharmacy with the prices and sophistication of a large company.

Now, in an era when the neighborhood pharmacy is being virtually run out of town, this private chain of pharmacies and drug services is on its way to becoming a major regional player.

"What we are is the corner pharmacy. We've taken the best of community pharmacy at the operating level and backed it up with the economies of scale and management that a chain would provide," said Mr. Bronfein, who quit banking to join his pharmacist brother-in-law, Mr. Ades, in the business full time in 1991.

Their rapid expansion plans for the next five years, however, are bigger than the Baltimore-based company could finance on its own. For the first time, the pair said, they will look for outside investors, possibly through the public sale of stock. The goal: $250 million in annual revenues.

After the first retail store, NeighborCare focused on a strategy of selling prescription drugs from small rented ground-floor spaces usually only 900 square feet -- in medical professional buildings and health clinics.

And the company bought vans to deliver drugs to homes and offices free of charge.

From there, NeighborCare began to supply drugs to nursing homes and, more recently, entered the infusion drug business, which allows patients needing prolonged treatments to receive them at home.

Drug stores in medical buildings aren't new. But the movement of medical care from hospitals to office complexes and into the home gave this type of business new impetus.

For the year ended June 30, revenues at NeighborCare, which is privately owned, rose 34 percent to $31 million. A 50 percent growth rate projected for 1995 two months ago was bumped to 62 percent recently, thanks to new contracts, including one for the 600-resident Stella Maris Nursing Home and Hospice in Towson.

"They seem to be putting them in the right places, like McDonald's. What made it so successful was their location," said Dennis Gifford, assistant vice president of St. Joseph Hospital. NeighborCare runs a 24-hour pharmacy operation in the Odea Medical Arts Building on the hospital's grounds.

The success of NeighborCare stems from a combination of personalities and strategies.

Mr. Bronfein, 38, president and chief executive officer, is the talker, the accountant and public policy gadfly with an essential belief in the survival of the fittest and the power of the marketplace to sort out the winners. He is in charge of strategic planning.

Mr. Ades, 46, executive vice president and chief operating officer, is the listener, the pharmacist familiar with the industry's front lines. He oversees daily operations at the company's Lee Street headquarters in Baltimore's Inner Harbor.

"If we both agreed on everything there wouldn't be a need for one of us," Mr. Ades said.

Their approach is conservative, even as they aim to stay one step ahead of the market.

For instance, Mr. Bronfein hesitated for years about getting into the home infusion business because he was "weary of the flimflams" in the high-margin industry and he refused to pay doctors for referrals. "So we had to be better or different," he said.

Mr. Ades finally persuaded him it could be done. Instead of paying for referrals, the company expanded its consulting business to include an educational program on how and when to use the more-sophisticated equipment and infusion techniques.

It brought the program to long-term care facilities that were already NeighborCare customers and that wanted to upgrade their nursing skills. The program allows nursing homes to take patients earlier from the hospital and increase their revenues.

At the same time, the strategy created a demand for NeighborCare products without the usual payments to doctors. In short, NeighborCare started in the business with a lower cost structure than competitors, shielding itself from losses when profit margins in the infusion business dropped.

It's a formula they've used again and again.

Rule of thumb

The two men credited NeighborCare's growth rate of 30 percent recent years to a decision to invest in technology rather than bricks and mortar, and a reliance on an old rule of thumb that has been handed down through their two families, both steeped in running their own businesses: find the customer's needs and fill them.

One of their most visible tactics was to rely on a fleet of vans to extend the reach of the company's small, rented spaces inside office buildings.

The company's free-delivery service, by NeighborCare vans that double as moving billboards, boosted sales and helped create a perception of the company as an old-fashioned pharmacy.

"The No. 1 reason people choose pharmacies is convenience, and what is more convenient than a delivery system that ties them to the pharmacy?" said Mr. Ades. Free deliveries are particularly popular with elderly people concerned with safety, he said, adding "we do a lot more deliveries in darker winter months than in summer."

More than a sales gimmick, however, the van service is an integral part of the drug management system and

NeighborCare's strategy to cut costs: it delivers a fresh supply of a person's drugs just as its computers say the old batch has run out. The vans also allow NeighborCare to serve a large number of people in one region, leading to lower costs.

Indeed, the firm's early success lies in the management of drugs and information systems, not discount prices or generic drugs. It recently won an exclusive marketing agreement to use "Medicine on Time," a system developed by a North Carolina company, that pre-packages daily drug doses. The system is designed to make sure people take the drugs prescribed for them, reducing the chance their illnesses will worsen.

It also is the only chain in the region with a computer system that can access a customer's history at any location.

Continuity of care

And by being able to handle a full range of drug services for the same patient as he or she moves from a hospital to a nursing home, rehabilitation center, and home, the company is aiming to appeal to doctors and managed care companies that are concerned about the continuity of care after patients are discharged from the hospital.

The system, unusual in the industry, attracted the attention of U. S. Secretary of Health Donna Shalala, who, during a visit to NeighborCare in May, used it as an example of the type of business that can prosper under health care reform.

In addition to running the business, Mr. Bronfein, a former vice president of Signet Bank, is an important Democratic party fund-raiser and serves this year as finance director for gubernatorial candidate Lt. Gov. Melvin A. "Mickey" Steinberg. He attended the White House wedding of friend Tony Rodham, brother of Hillary Rodham Clinton, and has been consulted on health issues by Maryland lawmakers, including U. S. Sen. Barbara Mikulski and Rep. Benjamin Cardin.

Over the years, competing neighborhood pharmacies have wondered aloud whether Mr. Bronfein's political activism was a key to the company's success. NeighborCare's first contracts, which it still has, were with neighborhood clinics set up by Ms. Mikulski.

"Politics never got me squat," Mr. Bronfein said, adding that NeighborCare won the contracts because of the quality of its bids.

He said he has no sympathy for his competitors who, he said, don't provide health insurance for their employees and paint themselves as victims when a competitor comes up with a better idea.

"The market is a very efficient animal," he said, "and maybe some of these small businesses don't need to exist."

Most drug retailers weren't interested in setting up shop in small outlets like office buildings and health clinics when tiny NeighborCare got its first big contracts in 1986.

One of its earliest customers was the former Johns Hopkins Health Plan, now owned by Prudential HealthCare Plan of the MidAtlantic, which saw access to prescription drugs by Medicaid patients at its clinics as a critical service.

"We solicited bids from several pharmacy companies, and they [NeighborCare] had the guts and the smarts to put that together," said Ancelmo E. Lopes, who oversaw the project for Hopkins and now is president of the local Prudential plan. "They gave us an attractive arrangement and at the same time were able to make a profit," he said.

NeighborCare is the third-largest provider to Prudential members after Giant and Rite-Aid, Mr. Lopes said, adding that Prudential members probably have access to more independent drug stores in the state than any other health plan. "We don't direct members to one or the other, so the tremendous growth [of NeighborCare] is the result of patient choice," Mr. Lopes said.

NeighborCare's other customers include insurers and managed care companies, including U.S. Healthcare, Aetna, and two Blue Cross and Blue Shield-owned health maintenance organizations.

Expansion plans

Over the next 24 months, NeighborCare wants to expand each of its three divisions -- outpatient professional pharmacy, long-term care, and infusion -- into the Washington suburbs of Maryland and Virginia, and ultimately into North and South Carolina.

So far, the company's growth has been financed from profits -- 14 consecutive years of them. But now NeighborCare is considering a public stock offering to finance acquisitions that could boost its annual growth rate to 50 percent or 100 percent.

The five-year revenue goal of the company is $250 million, with a ten-fold increase, to 30,000, in the number of long-term care beds under contract for drugs.

On Sept. 1, NeighborCare plans to launch a fourth division, a prescription drugs-only managed health care plan aimed at small businesses in Maryland.

NeighborCare says its expenses and cost will be lower than management companies that specialize in helping corporations and managed care companies cut the cost of drug benefits because, unlike the management firms, it also owns the dispensing pharmacies.

Its goal is to enroll 60,000 people by year's end, taking the approach with small businesses of "maybe you can't afford to give employees health insurance, but what about this?" Mr. Bronfein said.

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