Bergen Brunswig Warns Earnings May Be Off

Bergen Brunswig Corp., one of the largest U.S. suppliers of drugs to health-care facilities, warned Thursday that its earnings could be lower than expected because a new Medicare reimbursement program is cutting revenue.

Changes to Medicare, the federal health insurance program, has shifted its payment method from a cost-based to a fix-based system. This means that doctors now have a fixed amount of money for different types of care compared with the previous method, which reimbursed them for whatever costs they had.

“The overall industry trend is a dismal one,” said Steven Valiquette, a Warburg Dillon Read Inc. analyst, who lowered his rating to “hold” from “buy” on Orange-based Bergen Brunswig. “The bottom line is you can’t fight these industry trends.”

Meanwhile, Covington, Ky.-based Omnicare, which also provides pharmacy services to nursing homes and other institutional health-care facilities, said it expects second-quarter earnings to fall short of analyst expectations because of the new Medicare payment system.

Omnicare is the largest pharmacy supplier, while Bergen Brunswig’s newly acquired PharMerica unit is No. 2.

Bergen shares fell 22%, losing $4.06 to close at $14.81 on the New York Stock Exchange. Omnicare shares fell 20%, falling $3.25 to close at $12.81, also on the NYSE. Shares of NCS Healthcare Inc., another rival, fell $1.06, or 11%, to close at $8.13 on Nasdaq.

Bergen Brunswig said it is reviewing its third-quarter and fourth-quarter earnings because its PharMerica unit was hurt more than expected by the Medicare changes.

Bergen Brunswig bought PharMerica for $1.1 billion in stock and debt in April. Although analysts expected the purchase to add to earnings as early as next year, Medicare changes are affecting revenue.

The situation could get worse for suppliers, analysts said, because much of the control over their revenue is in the hands of nursing-home operators, who decide which patients will be admitted to their facilities.

Lehman Bros. analyst Lawrence Marsh said Bergen Brunswig could have more trouble, because its lower revenue projection is for April and the PharMerica transaction closed late in that month.

“It doesn’t take long,” Marsh wrote in a note to clients. “Fifty-one days after Bergen closed its controversial acquisition of PharMerica, the company has started to discuss results from that business that are coming in below expectations.”