Bergen and Ivax split, but synergy lingers

Drug Store News, April 7, 1997 by Allene Symons

ORANGE, Calif. -- When Bergen Brunswig backed out of the proposed merger with Miami-based generic manufacturer Ivax Corp. late last month, the marriage of a manufacturer and drug wholesaler seemed less surprising than it did back in November.

That's because for the past couple of years the drug wholesale industry has reverberated with precedent setting deals and surprising synergies.

This one fell apart, according to Bergen, because of various breeches of the merger agreement. Bergen has filed a lawsuit against Ivax over those allegations.

Bergen president and chief executive officer Don Roden also told analysts in a telephone conference call that "the conduct [of Ivax] eliminated them as someone we would go into the future with."

Ivax disagreed, responding that Bergen had "unilaterally terminated, without good cause" the merger agreement."

The $1.65 billion merger proposed in November was criticized by many analysts who saw Ivax as a company burdened by long-term debt and other problems.

Analyst Don Spindel of AG Edwards in St. Louis said, "I think they [Bergen] went into it with their eyes open. They knew it was a troubled company." He added, "Certainly Ivax is having its share of problems but I think Bergen Brunswig believed they would be able to fix the problems with Ivax."

Another initial cause for criticism was the unusual pairing of a wholesaler and manufacturer. But the deal might have met with less surprise if it had been proposed by, say, Cardinal, who has already made two bold moves by merging with the Medicine Shoppe franchise pharmacy chain and by making the consignment-style Kmart pharmacy deal.

Analysts agree the synergy expected from the Bergen/ Ivax deal remains and the drug wholesaling industry and Bergen in particular intends to pursue vertical integration. As Bergen chief Don Roden said, "Notwithstanding the termination of the Ivax agreement, we will continue to pursue our strategy, recognizing the valuable role that generics play."

One of the synergies that attracted Bergen was the generic business. Drug wholesalers have a unique opportunity to harness profitable generic drug sales. This is due to the thousands of outlets they supply, including independent pharmacy networks, retail chains and hospitals.

Equity analyst Kristi Thiese of St. Petersburg, Fla.-based Raymond James & Assoc., told Drug Store News that it made sense for Bergen to acquire a captive manufacturing component. Thiese said now that Bergen has gained momentum courting a generics partner, "I think they will search for alliances or acquisitions on that front."

In the collapsed Bergen Ivax deal, there were other synergies with Ivax like its businesses in the branded pharmaceutical and medical supply segments.

The medical surgical supply area is one of Bergen's strengths. Although only a small percentage of its revenue, and although margins may be small in med-surg, this business has a lower cost of service and provides attractive one-stop-shopping for customers like hospitals.

Despite the failed deal, there will be more surprises ahead in the wholesale drug channel. "Wholesalers have moved away from being passive middlemen," said Spindel. "As they try to take advantage of opportunities and adapt to managed care, they have had to become more proactive in finding products and services that add value and lower costs for their customers."