Under pressure from managed-care companies and hospital giant Columbia/HCA Healthcare Corp., a major medical-supply distributor and a pharmaceutical company have decided to merge in a stock swap valued at $1.4 billion.
Bergen Brunswig Corp., a titan in drug and medical-surgical distribution, and Ivax Corp., the country's biggest generic drugmaker, announced last week that they have reached a definitive agreement to consolidate.
The distribution-manufacturing marriage would be one of the largest of its kind in the healthcare industry. Orange, Calif.-based Bergen Brunswig's wholesale drug distribution muscle would be joined with Miami-based Ivax's manufacturing capabilities in a new company called BBI Healthcare.
Executives contend the combination would produce immediate cost savings of $30 million and that within two years BBI Healthcare's revenues would grow in excess of 20% annually.
Bergen has annual revenues of $9.9 billion, and Ivax has $1.2 billion in revenues.
Pricing pressure from managed-care organizations was instrumental in driving the deal, executives said.
"When it comes to supplying the managed-care provider. . . we couldn't give them (product) for any less money," said Robert Martini, Bergen Brunswig chairman. "We have to take costs out of the system. And this is a way to do it."
Bergen Brunswig, the sole wholesale drug supplier to Columbia, cited the hospital chain's price demands as an important catalyst for the transaction. The dollar values of Bergen's business with Columbia and Columbia's discount requests were not disclosed.
"Columbia just couldn't squeeze us any harder than they were squeezing," Martini said.
And Columbia's quest for continual savings "was not atypical" of managed care overall, Martini said.
By controlling drugs from the point of manufacture all the way to their being dispensed to patients, executives said BBI Healthcare would wring out waste, dramatically improve inventory control and more fully realize revenue growth through Bergen Brunswig's popular one-stop generic drug supply program.
All told, the deal would improve margins and provide additional pricing flexibility, executives said.
Bergen Brunswig's chief financial officer, Neil Dimick, predicted the new company would be up and running by February 1997. That's provided shareholders and regulators approve the deal, which would be achieved through a tax-free stock swap.
Margins at both companies have wilted under unrelenting customer pressure to shave prices.
In fact, Ivax also announced a third-quarter loss of $178.7 million. It blamed the decline on a combination of depressed revenues and restructuring charges.
Wall Street was unimpressed by the proposed merger, however, and swiftly punished both companies' shares.
Bergen Brunswig's stock slid almost 16% to $27.63 per share on the New York Stock Exchange, while Ivax shares lost 21% to close at $12.50 in American Stock Exchange trading on Nov. 11, the day the deal was announced.
Martini attributed investor reaction to a misunderstanding of the deal's strategic benefits. Acquiring another wholesaler, for example, would have been a "slam dunk" with investors, he said. But this merger, which Martini conceded was a bit complicated, represents an untried strategy and "not just a financial transaction to take somebody out of business."
Some investors seemed to take heart on Nov. 12, though, as Bergen Brunswig shares rose 88 cents to close at $28.50. However, Ivax shares closed down 13 cents at $12.38.
"Once the dust settles, most observers will recognize that, while this is a bold move and not a riskless transaction, there are lots of potential synergies here," said Donald T. Spindel, an industry analyst with A.G. Edwards & Sons, St. Louis.
BBI Healthcare would be headquartered in Miami, hometown to Ivax. Donald R. Roden, president of Orange, Calif.-based Bergen Brunswig, would become BBI Healthcare's chief executive officer. Ivax Chairman Phillip Frost, M.D., and Bergen Brunswig's Martini would serve as co-chairmen.