PMSI - what's for sale? and how much will it cost?

Wednesday, January 30, 2008 | 0

By Joe Paduda

So you're interested in buying PMSI/Tmesys?

Here's what you'll get, and my guess as to what you'll have to pay.

Assets

Customers -- PMSI/Tmesys provides WC PBM services to large and mid-tier carriers, TPAs, and self-insured employers. Customers include AIG, the Hartford (currently in the RFP process), Gallagher Bassett, Ohio Casualty, and Southwest Airlines.

Mail order facility -- the company's WC mail order capabilities are extensive and experienced, and are likely the largest in the WC business -- but are miniscule in comparison to Medco and Express Scripts.

DME/HHC ---PMSI is a large supplier of durable medical equipment and home health care services and related ancillary services, a business with solid margins and less price competition than pharmacy.

Distribution -- the company's reach extends into most payers in WC; but the sales and account management staff has been turning over at a rapid rate, with some estimating that 50% of the staff have been there a year or less.

Pharmacy network -- PMSI is one of the few PBMs that owns its own pharmacy network (Cypress Care, an HSA client, is another) and therefore does not have to share margins with a network owner (e.g. Restat or Caremark). However, PMSI's network rates aren't materially better than the company's competitors.

Technology -- PMSI was one of the first WC PBMs to begin profiling physician prescribing behavior. The tool developed by PMSI, Arkos, has been used by PMSI and their customers to identify physicians with prescribing patterns outside norms.

Liabilities

PMSI has been going through a "right-sizing" (corporate speak for layoffs) for the last four months. The negative impact on survivors is tough to estimate, but certainly won't be positive. Sources also indicate there has been a lot of turnover at the mid- and senior-management levels, turnover that has impacted customer relationships and dragged down morale.

PMSI's last quarter margins were down considerably, with income declining $8 million (see latest 10-K filing) to $1.6 million. Management at ABC has repeatedly voiced their confidence in the turnaround; in the latest earnings call ABC execs said they expect margins to return to 7-9% in FY 2009 (which starts end of September 2008). Which leads to the obvious question:

How much?

There are so many moving pieces here -- the debt markets, decline in the equity market, recent WC PBM deals, PMSI's declining revenues, customer losses and the financial impact of significant investment in IT infrastructure that it is anyone's guess. Starting with the margins, at a revenue run rate of $450 million and an 8% margin, that translates to $36 million. The big issue is the multiple - the world of the 14x multiple is likely gone, at least for now.

If PMSI is sold, the price will likely be in the $200 to $300 million dollar range. That looks low, but market factors and the uncertain success of the afore-mentioned turnaround make anything higher doubtful. Remember, the financial impact of the turnaround initiatives won't show up until FY 2009 -- which starts October 2008.

That said, management has clearly stated that if they do not get the price they want, they won't sell. My guess -- and I could be way off -- is they are looking for a price in the $400 - $600 million range.

Joseph Paduda's Weblog, managedcarematters.com, on managed care for group health, workers compensation and auto insurance, covering health care cost containment, health policy, health research, and medical news for insurers, employers, and healthcare providers. Paduda is the principal of Health Strategy Associates.