A bankruptcy filing last week by a FoxMeyer Health Corp. unit stems at least in part from the drug distributor's aggressive bids for hospital business, experts say.
In particular, FoxMeyer's troubles were fed by a contract that took effect in 1995 with University HealthSystem Consortium, said Lawrence Marsh, an analyst at Wheat First Butcher Singer, a Richmond, Va., securities firm. The contract, worth $4 billion to
$5 billion through 2000, is among the biggest drug distribution deals in the hospital industry (Aug. 1, 1994, p. 18).
A FoxMeyer spokesman dismissed speculation about the causes of its financial problems, saying it's too soon to identify "smoking guns."
Many FoxMeyer customers are lining up alternate distributors. The most likely danger for hospitals is that FoxMeyer won't ship drugs as quickly if drugmakers restrict its credit. Because many hospitals rely on daily deliveries, "there are hundreds of items you can run out of," said Thomas Newkirk, pharmacy director at 241-bed Froedtert Memorial Lutheran Hospital, a UHC member in Milwaukee.
Carrollton, Texas-based FoxMeyer is the fourth-largest U.S. drug distributor, with annual revenues of $5.5 billion. Hospitals and other providers represent one-third of its business.
It filed for Chapter 11 bankruptcy protection in Delaware last week for its drug distribution unit, FoxMeyer Drug Co., which accounts for 98% of sales. FoxMeyer reported $1.2 billion in assets and $1 billion in liabilities as of June 30. The parent company isn't included in the filing.
The bankruptcy filing and a newly arranged $775 million financing package will ensure good customer service, FoxMeyer executives pledged. Also last week, the company tapped Robert Peiser, who helped restructure Trans World Airlines, as vice chairman and chief executive officer.
The bankruptcy filing surprised many hospitals, coming just days after FoxMeyer announced a proposed $25 million sale of the drug distribution unit to turnaround specialist William Taggart. The deal reportedly fell through because Taggart was unable to raise financing for the company.
In St. Louis, BJC Health System said its hospitals endured poor service in August when some manufacturers put FoxMeyer on credit hold. The system, which operates 14 hospitals, is one of FoxMeyer's largest customers at $60 million in annual spending. It will remain with the company if service is satisfactory, said Jim Francis, a BJC vice president.
UHC has lined up Cardinal Health and AmeriSource Corp. as alternate distributors, pharmacy directors said. The alliance, based in Oak Brook, Ill., declined to comment on its contract with FoxMeyer. Under the agreement, about 50 UHC members made FoxMeyer their prime drug distributor.
The contract boosted FoxMeyer's business with providers by about 50%, but the firm is said to have underpriced its services considerably. "There was widespread skepticism that FoxMeyer was going to be able to make any money on this," Marsh said.
FoxMeyer might have pursued new business so aggressively to make up for a disastrous contract with Phar-Mor, he said. The drugstore chain owed FoxMeyer $72 million when it filed for bankruptcy protection in 1992.
A new, state-of-the-art distribution center in Ohio was supposed to help FoxMeyer turn a profit. Instead, problems at the center resulted in about $94 million in charges in the second half of fiscal 1996.