Orange’s Bergen Brunswig Plans to Buy PharMerica

Moving to boost profits by getting closer to patients, Bergen Brunswig Corp., one of the nation’s largest drug wholesalers, said Monday it plans to buy one of its big customers, PharMerica Inc. of Tampa, Fla., for $820 million in stock.

Ownership of PharMerica, which provides drugs to 500,000 patients in nursing homes and other long-term-care facilities, would give the Orange-based Bergen a foothold in a market that promises bigger margins than its basic drug-distribution business, company officials said.

Under the deal, Bergen Brunswig would give PharMerica shareholders 0.275 of a Bergen Brunswig share for every PharMerica share. Bergen also would assume $580 million of PharMerica’s debt.

Analysts applauded the move, saying the acquisition would give the nation’s No. 3 drug wholesaler a 20% chunk of a market that is expected to grow as the population ages. But Bergen Brunswig investors weren’t enthusiastic.

The Orange wholesaler’s shares slumped $5.50, or 17%, to $27 on the New York Stock Exchange, while PharMerica shares rose 56 cents to $7.06 on the Nasdaq.

In a teleconference with reporters Monday, Bergen Chief Executive Donald Roden said the company could wring profits from PharMerica by streamlining its 168-pharmacy network and hooking it up to a common business information system. He said the merger would cut out one step in the distribution of drugs to nursing-home patients by eliminating PharMerica as a middleman distributor.

Roden declined to comment on the stock’s decline.

PharMerica--which was formed in a December 1997 merger of two pharmaceutical firms--posted a loss of $105.4 million, or $1.19 a share, for the nine months ended Sept. 30, on revenue of $852 million. The results included charges of about $150 million for a corporate restructuring, uncollected bills, asset write-downs and other items.

Still, analyst Kristi Thiese at Raymond James said the acquisition makes good business sense. “Now, it’s like having two distribution supply chains when we only need one,” she said.

Bergen Brunswig officials stressed that the deal should benefit its network of independent retail pharmacies--a group of business customers that had strongly objected to the company’s now-dead proposal to merge with its wholesaling rival Cardinal Health Inc.

This time, Bergen Brunswig officials promised that some retail pharmacies will have an opportunity to serve nursing-home patients in rural areas too expensive for PharMerica to serve directly.

John Tilley, a former Bergen Brunswig customer who owns three independent drugstores in Downey, predicted that other independents will grumble about the PharMerica deal but probably won’t raise a serious protest.

Other observers discounted the possibility that the deal might raise antitrust concerns by government regulators who recently blocked Bergen’s effort to merge with Cardinal Health. (At the same time, the Federal Trade Commission also stymied a similar merger of industry giants McKesson Corp. and AmeriSource Health Inc.)

Since then, the industry giants have moved to expand in less-controversial ways. McKesson Corp. is buying HBO & Co., the large writer of software for health care companies, and Cardinal is entering the medical supply and cost-management field by purchasing Allegiance Corp.

Bergen Brunswig’s acquisition of PharMerica, subject to approval by shareholders of both companies and by regulators, is expected to be completed by the end of June.

Assuming the deal proceeds, PharMerica would retain its name as a Bergen Brunswig subsidiary; it would be headed by Charles J. Carpenter, 49, executive vice president and chief procurement officer of Bergen Brunswig.

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Bergen Brunswig Corp. PharMerica Inc. Headquarters: Orange Tampa, Fla. Employees: 5,400 8,000 Founded: 1888 1997* Chief executive: Donald R. Roden C. Arnold Renschler **1998 net income $103.9 million $ 51.4 million 1998 revenue $13.7 billion $1.1 billion Mon. stock price: $27.00 $7.06 Daily change: -$5.50 +$0.56

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*Merger of Pharmacy Corp. of America and Capstone Pharmacy Inc.

**12 months ended Sept. 30. Excludes special charges.

Source: Bergen Brunswig Corp.