Word that FoxMeyer Corp. had won a $4 billion to $5 billion drug distribution contract-perhaps the biggest ever-has drawn a skeptical reaction on Wall Street.
When the contract with University Hospital Consortium became public July 14, shares of the Carrollton, Texas-based company rose just 75 cents to $15.75 in New York Stock Exchange trading. Analysts wondered if Fox-Meyer could keep its promises to the Oak Brook, Ill.-based alliance.
Haunting the company is investors' memory of a disastrous contract with Phar-Mor, which led to a $42.8 million charge last year, and past over-estimates of earnings. Phar-Mor filed for Chapter 11 bankruptcy protection in August 1992 after an internal scandal involving alleged embezzlement by top officers. It owed FoxMeyer $72.4 million.
Previously, UHC worked with several distributors, including FoxMeyer. When it solicited bids early this year, UHC planned to pick one or two firms, said Michael Webster, FoxMeyer's head of sales and marketing. The alliance doesn't comment on contracts.
The contract-almost all of it new business for FoxMeyer-will increase the firm's annual sales by about 20%, or $800 million. It will run five years if UHC exercises a renewal option.
"There's a number of positives," said Don Spindel, an analyst at the AG Edwards brokerage firm in St. Louis. "This is going to give them a toehold from which to expand. On the other hand, with any large contract, you're certainly pushing the envelope on your capabilities."
By the contract's Feb. 1 start, Fox-Meyer plans to add seven new distribution centers to serve the 51 participating hospitals. FoxMeyer also will provide additional services, including systems to help the hospitals track drug inventory, contract compliance and usage patterns.
That promise, in particular, is interesting because the company has lagged behind other firms, such as McKesson and Bergen Brunswick, in the development of computer systems, said William Jelin, an analyst at Hamilton Investments in Chicago. In 1992, however, FoxMeyer made plans to spend $65 million on information technology, an investment that will be completed in 18 months, Mr. Webster said.
A restructuring last August also lowered its overhead. The resulting layoffs of about 400 people, however, hurt morale. "This contract really rejuvenated our entire company," Mr. Webster said.