Nuclear Drug Firms’ Merger Deal Develops Short Half-Life
The deal that brought Monty Fu and Robert L. Sanchez together was billed as a merger of equals, but it is looking more and more like a one-sided affair.
The two executives were united in May when Fu’s company, Syncor International, merged with Sanchez’s, Nuclear Pharmacy. At the time, Fu and Sanchez decided to share the duties of chief executive of the combined company, the nation’s largest chain of radioactive drug pharmacies.
They also agreed to find a new name for their business. And Fu consented to close Syncor’s headquarters in Sylmar and to relocate it to Nuclear Pharmacy’s main offices in Albuquerque.
Power Shifts to Fu
All of those agreements, however, had a very short half-life. What remains is a balance of power that Fu may have always wanted.
The 39-year-old, Taiwanese-born Fu took over as the merged company’s sole chief executive last month when Sanchez resigned as co-CEO after a dispute between the two. After that, Fu decided to keep the company’s headquarters in Sylmar and to phase out the Albuquerque offices instead.
Name Change in Store
Next month, shareholders are expected to approve a proposal to change the name of the merged company--now legally known as Nuclear Pharmacy--back to Syncor International.
All told, Fu conceded, Syncor is “taking over a company without paying a premium,” instead of combining with Nuclear Pharmacy in the fashion of the originally announced deal.
The merged company consists mainly of 74 so-called nuclear pharmacies scattered across the nation that prepare radioactive drugs used at hospitals and clinics to diagnose illnesses. After being injected into a patient, the radio-pharmaceuticals might locate a patient’s heart, kidney or liver and then emit gamma rays that are used to make a picture of the organ.
Although some analysts doubt that Fu can turn the company into a consistent money-maker, he showed skill in coming out on top in the merger deal.
Syncor Held Advantage
Both Fu and Sanchez say the key to Fu’s success on that score was structuring the deal so that shareholders of the old Syncor held about 51% of the stock in the combined business. On top of that, the biggest shareholders in the new company, with 15% stakes each, were Fu’s family and Compagnie ORIS Industrie, a unit of France’s Atomic Energy Commission and a business partner of the old Syncor.
Sanchez said in a telephone interview that he quit as co-CEO because of a difference “in management style.”
Fu and William A. Kemmel Jr., the company’s secretary and general counsel, offered few further details, other than to say that Sanchez wanted a more centralized organization than they did.
Fu noted that the speed with which the merger was arranged invited problems. He said that, although the two companies casually discussed combining for five or six years, the deal eventually was put together in two days when Nuclear Pharmacy became concerned that it would become the target of a takeover attempt by Costa Mesa-based ICN Pharmaceuticals.
“We didn’t consider all the possibilities,” Fu said. “We thought it was going to work, but it didn’t.”
Sanchez, 35, hardly left his job empty-handed. The company bought back his 3% stake at the approximate market price, which came to $2.2 million.
Sanchez also received a severance payment of $445,000 and will stay on the company’s payroll as a consultant for three years, at $178,000 a year. Some of his old duties are likely to be assumed by Henry-Michel Bouillet, a former Compagnie ORIS Industrie executive who was brought in as president when Sanchez resigned.
Company officials say they want to change the company’s name back to Syncor for several reasons. Fu said both sides at first agreed to come up with a name that would give the merged organization a new identity and avoid the word “nuclear,” which he believes casts a negative image.
But, Fu said, the expense of renaming the company, and the board’s inability to come up with a good new name, prompted management to ask shareholders to go back to being Syncor.
‘Where the Action Is’
As for establishing the merged company’s headquarters in the Los Angeles area, Kemmel said, it was simply a matter of wanting to be in a major business center.
“L. A. is where the action is,” he said.
Kemmel said the company is searching for larger quarters in the San Fernando Valley area. The company also is looking for a tenant for its Albuquerque offices, where the lease has 15 years remaining.
Once the logistics of merging Syncor and Nuclear Pharmacy are settled, the company will need to concentrate on trying to turn profits. The radio-pharmaceutical industry has long been rocky.
Syncor lost $894,099 on sales of $31.6 million in its fiscal year ended Sept. 30, 1983, and then came back with a profit of $206,126 on sales of $37.2 million the next year. During its fiscal year ended May 31, 1984, Nuclear Pharmacy lost $1.1 million on sales of $41.3 million.
The combined company, however, posted earnings of $610,382 on sales of $22.4 million in the three months ended Aug. 31, its first full quarter since the merger.
Could Be a Money-Maker
Fu maintains that his 11-year-old company finally is in a position to be a consistent money-maker. He said the merged company--which he predicts will record more than $90 million in sales this fiscal year, nearly half of the national market--will cut its costs by consolidating administrative operations.
The company already has closed five nuclear pharmacies, including facilities in Glendale and Torrance. Company officials said the work once done there was shifted to their nuclear pharmacies in Van Nuys and Anaheim.
The work force has not been cut, however. The merged company employs about 1,400 people nationwide, including about 210 in Southern California.
Fu said another benefit of the merger is the company’s enlarged distribution network, which he contends will give it an advantage in negotiations with national hospital chains. Fu said the company’s distribution system also could be used to sell other kinds of medical supplies.
Some analysts are less sanguine. Joseph E. Eichinger, an analyst with Cable Howse & Ragen in Seattle, said that, if Fu tries to use the merged Syncor-Nuclear Pharmacy distribution arm to sell new products, it will run into stiff competition from much larger national medical supply companies.
‘A Lot of Smoke’
“I think it’s a lot of smoke,” Eichinger said. “They’re still poorly positioned and they’re just reaching.”
Analysts also say that the already-small nuclear pharmacy business is stagnating or diminishing because hospitals are cutting back on the diagnostic procedures that use radio-pharmaceuticals. Furthermore, a new diagnostic technique is being developed that could make radio-pharmaceuticals unnecessary in some cases.
The technique, known as magnetic resonance imaging, uses equipment that takes pictures of internal organs without using a radioactive drug to locate the body part.
On top of that, critics say, the company is vulnerable to competition from its suppliers. Companies such as Du Pont and Mallinckrodt have sold radio-pharmaceuticals to Syncor and Nuclear Pharmacy, but also directly to hospitals, some of which perform the nuclear pharmacy work themselves.
Analysts say the major drug suppliers may try to undercut nuclear pharmacy companies by offering to sell their products at much lower prices to the hospitals.
Steven Reid, an analyst in Los Angeles with the Wedbush, Noble, Cooke brokerage, predicted that Fu will pursue another merger with a health-care supplies firm to improve his company’s competitive position. Although the company needs more management talent and a broader product line, Reid said, it could offer a potential merger partner such as ICN an attractive distribution network.
But company officials talk as though the Syncor-Nuclear Pharmacy merger already gives them enough muscle to succeed.
“Building a national network has always been our goal. . . ,” Fu said. “Everybody knows this was the way we had to go to have a real strong company. We have it now.”
