Bergen Brunswig Selling Most of Ailing Drug Unit to CVS

Bergen Brunswig Corp. is selling most of a struggling pharmacy unit that has been a drag on the drug wholesaler’s earnings, the firm’s latest effort to reduce its debt and focus on its core wholesale drug distribution business.

Orange-based Bergen said Wednesday that it has agreed to sell most of its Stadtlander specialty pharmacy unit to CVS Corp., the nation’s largest drugstore chain, for $124 million in cash, a fraction of what Bergen paid for the unit 17 months ago.

As part of the arrangement, Bergen will supply $2.5 billion worth of drugs to CVS over the next five years.

Last week, Bergen Brunswig, the nation’s third-largest drug wholesaler, agreed to sell its medical-supply distribution unit to rival Cardinal Health Inc. for $181 million in cash.

Bergen said it plans to use proceeds from the two transactions to reduce $1.25 billion in long-term debt. Over the next year alone, Bergen will be able to save about $30 million in interest payments, Chief Financial Officer Neil Dimick said.

“We’ve sent a message to the market that we’re laying off a large amount of debt and refocusing our attention to our core business,” he said.

Wall Street applauded the move. After the announcement, Bergen’s stock closed at $7.31, up $1.50 a share, or 26%. Still, the shares have lost more than 55% of their value over the last 12 months. CVS stock closed at $39.69, up 31 cents a share. Both stocks trade on the New York Stock Exchange.

The sale will allow Bergen to clear up “one of the major clouds that has held its stock back,” said A.G. Edwards analyst Andrew Speller, who has a “hold” recommendation on the shares.

Bergen had acquired Stadtlander in January 1999 for $335 million in cash and stock to expand its distribution of specialty drugs--expensive and rarely prescribed medications used to treat people with HIV/AIDS, organ transplants, cancer and other illnesses. Bergen also agreed to assume $100 million in debt.

But Stadtlander has been a consistent money-loser. Its operating losses for the six months ended March 31 totaled $14.9 million, Bergen spokeswoman Barbara Pronin said.

The losses and disappointing results for some other units took a toll on the parent company. In its second fiscal quarter, Bergen’s net income fell 55% to $17.3 million, or 13 cents a share, although sales rose 18% to $5.9 billion.

Last October, Bergen filed suit accusing Stadtlander’s former owner, Counsel Corp., of fraudulently inflating the pharmacy unit’s profits. Bergen will continue to pursue the legal action, Dimick said.

Bergen said it would take a one-time charge of about $250 million from discontinued operations as a result of the Stadtlander sale, and would restate earnings from continuing operations to add 9 cents a share for the six months ended March 31.

Bergen is retaining the profitable Stadtlander division that provides pharmaceuticals to 330,000 inmates in privately operated prisons, but is in talks with potential buyers, according to Dimick, the chief financial officer.

He said the company has no plans to sell other units in the near future, including the disappointing PharMerica operations that Bergen bought for $1.1 billion in stock and cash in April 1999. PharMerica provides drugs to nursing homes.

CVS said the acquisition of Stadtlander would add 2 cents per share to its 2001 earnings. CVS expects to realize the gain by streamlining Stadtlander’s operations but provided no details, said CVS spokesman Todd Andrews. The acquisition of Stadtlander brings CVS 500,000 new customers and fits the company’s strategy of growing its specialty medicine distribution business, Andrews said.

CVS, based in Woonsocket, R.I., has been expanding its special drug operations through its ProCare stores, which are about one-fifth the size of typical CVS pharmacies but offer more personalized service. By contrast, most of Stadtlander’s customers receive their drugs via mail.

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On the Rebound?

Bergen Brunswig’s stock surged Wednesday after the drug maker said it is shedding a money-losing unit that has been a drag on the Orange company’s earnings and turned off investors. Daily stock price:

July: $7.31

Source: Bloomberg