Drug distributor Bergen Brunswig Corp. said Monday that it will cut as many as 500 jobs--one-eighth of its U.S. work force--in the next 18 months.
Distributing drugs to pharmacies is less profitable these days because drug prices aren’t rising as quickly as they once did. So Bergen and some other big drug distributors are closing distribution centers and shutting down branch offices to cut their costs and boost profits.
The company, based in Orange, said it will take a $21-million charge against earnings after taxes for the restructuring. That will result in a loss of up to $14 million for the fourth quarter of its fiscal year, which ended Aug. 31. The company said it will still post a profit for the year.
Bergen, with $5 billion in sales last year, is the nation’s No. 2 drug distributor. San Francisco’s McKesson Corp., the largest, took a similar restructuring charge last year.
Bergen would not say Monday how it plans to cut its 4,000-person work force but said it might use layoffs as well as attrition. The company employs about 600 in Orange County.
The company expects to close three or four more of its 35 drug distribution centers nationwide. It has already closed centers in San Diego and Las Vegas and moved their operations to Corona.
Bergen has also recently acquired several competitors, some of whose operations can be closed because the same kind of work is already being done elsewhere in the company.
Because large drug store chains account for a growing proportion of U.S. pharmaceutical sales and can demand lower prices, drug manufacturers and distributors have been forced to keep prices down. The same thing is happening with the rise of health maintenance organizations, which buy drugs in volume at lower prices.
Because drug prices are not rising regularly anymore, distributors like Bergen Brunswig have tried to make up for lower sales by going after a bigger share of the market, stock analysts said. They have done that by lowering their prices to customers, analysts said.
With prices leveling off, the way to boost profits is to cut costs.
“This isn’t the first drug wholesaler to restructure, and it won’t be the last,” said Don Spindel at the brokerage A.G. Edwards & Sons in St. Louis. “In fact, it’s happening all over the health care industry.”
The depth of the restructuring and the fact that as many as 500 jobs may be lost surprised one analyst.
“This may be because margins have eroded during the quarter to a greater degree than they expected,” said Kevin E. Silverman of Kemper Securities in Chicago. “If there’s a positive, it may be they’re moving to where there’s more of a sense of urgency at the company.”
Ultimately, the slimming down of the distributors will be a good thing for the industry, analysts said. If the Clinton Administration succeeds at providing health insurance for everyone, drug sales should rise. The graying of the U.S. population also means more drug sales.
Bergen Brunswig said it expects to report sales of $6.8 billion for the fiscal year, up from $5 billion. In part, the increase comes about because Bergen bought several companies during the year, automatically boosting its sales.
The company said it expects to report annual earnings from continuing operations of as much as $28.6 million.
In Monday’s trading on the American Stock Exchange, Bergen’s stock closed at $15 a share, down 25 cents.