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Drug Companies Plan $1.4-Billion Merger

Pharmaceuticals: Analysts, investors skeptical about combination of Orange's Bergen Brunswig and Miami's Ivax.


Orange-based Bergen Brunswig Corp., one of the nation's largest drug distributors, announced plans Monday to merge with Miami-based Ivax Corp., the largest maker of generic pharmaceuticals, in a $1.4-billion deal aimed at selling more lower-cost drugs to consumers.

Ivax shareholders would own 56% of the new company, which would be called BBI Healthcare Corp. and be based in Miami. However, analysts see Bergen as the marketing powerhouse behind the merger, which should yield higher profitability for the new firm.

"Generic-drugs distribution is the single biggest profit center for wholesalers [such as Bergen], and generic makers find doing business with wholesalers a nightmare, said Hemant Shah, an analyst at HKS & Co. in Warren, N.J. "This puts the two together."

Executives said the combined company, which would retain a major presence in Orange County, may eventually be able to trim duplicative staff, improve margins and boost sales amid intensifying pressures to cut costs throughout the health-care industry.

Ivax stock tumbled about 22% and Bergen shares fell nearly 16%, indicating that investors and analysts are skeptical of the benefits of the first such merger between a major drug manufacturer and a large wholesale drug distributor.

"The deal makes sense theoretically but has a lot of practical problems," said analyst James Flynn at Furman Selz in New York.

He questioned, for instance, whether the combined company would have trouble obtaining products from generic makers other than Ivax, and if it would have trouble selling to pharmacies outside Bergen's network.

Though consumer groups, pharmacists and health maintenance organizations said they hope the Bergen-Ivax merger will lower costs, they're not counting on it.

Shareholders of Ivax, which has recorded sizable losses recently, would receive less than the stock's closing price on Friday. And Bergen Brunswig, which has a reputation for being a solid, steady operator, would be teaming up a money-losing business whose investors would own 56% of the surviving company.

Bergen Brunswig stock fell $5.125 on Monday to close at $27.625 in trading on the New York Stock Exchange. Ivax stock slumped $3.375 per share to $12.50, a 52-week low, on the American Stock Exchange.

Bergen Brunswig Chairman Robert E. Martini attributed the stock drop to the unusual nature of the deal.

"It's a breakthrough strategy that hasn't been done before," he said. "It'll take some time to convey the image to public shareholders that we believe that if we can increase sales, reduce costs and increase margins, the profitability" for the combined company would exceed the earnings of the individual businesses.

He said Ivax shareholders would end up with a larger share of the company because Ivax's market value exceeds that of Bergen.

Under the deal, Martini and Ivax Chairman Phillip Frost would share power as co-chairmen, and Bergen President Donald Roden would become chief executive. Roden was scheduled to become CEO of Bergen on Jan. 15.

Ivax shareholders would receive 0.42 share of stock in the new company for each share of Ivax stock. Bergen's shareholders would receive one share of BBI stock for each share of Bergen stock. Based on Bergen's Friday closing price of $32.75, Ivax investors would receive stock valued at $13.76, less than Ivax's price of $15.875 on Friday.

The new company would have combined annual sales of about $12.5 billion and employ more than 12,000 people. Ivax has 7,900 employees, Bergen Brunswig 4,250.

Martini indicated that the combined company would probably sustain--and even boost--employment at its corporate offices in Orange as well as at distribution centers in Corona and Valencia. The Orange facility employs 650 and the Corona and Valencia facilities each employ about 150, he said.

Ivax employs 1,400 people at a factory in Irvine.

As further evidence of Ivax's struggles, the company announced Monday that it lost $178.7 million in its third quarter on revenue of $222.7 million.

Wall Street hasn't been happy with Ivax's performance.

Analyst Thom Brown at Rutherford Brown & Catherwood in Philadelphia said he was "disgusted" to receive a fax from Ivax that trumpeted the deal, followed by another that disclosed the third-quarter results.

Consumer groups said they're taking a wait-and-see approach to the deal.

"Drug prices continue to be a major problem, particularly for the elderly," said Greg Marchildon of Families USA, a consumer health-care group in Washington. "I'm not sure that any merger, even one as unique as this one, is going to affect prices."

Other health-care officials said they worry about a possible increase in prices.

"We may not have the same negotiating leverage because there will be fewer players," said Sheree Aronson, a spokeswoman for Costa Mesa-based Apria Healthcare Group Inc., which provides home-health-care services.

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