Drug Distributors Fail to Soar on Retail Deals

Bergen Brunswick and McKesson are still well off their highs.
Publish date:

Two pharmaceuticals distributors trumpeted new multi-year sales agreements with drugstore chains Wednesday. But the deals did little to cure the distributors' ills on Wall Street.

Bergen Brunswick


(BBC) - Get Report

, of Orange County, Calif., said it signed a five-year agreement to be New York-based

Duane Reade's

(DRD) - Get Report

primary supplier of drugs and health care products. The deal is worth $200 million a year, the company said.


McKesson HBOC

(MCK) - Get Report

of San Francisco said it extended for six years a deal to serve as Youngstown, Ohio-based



primary supplier. That deal should generate $2 billion in revenue over its lifetime, the companies said.

Shares of Bergen gained 1/4, or 3%, to 8 1/16 by midday Wednesday, and shares of McKesson rose 1/4, or 1%, to 20 11/16. Phar-Mor shares gained 5/16, or 8%, to 2 15/16, but Duane Reade shares dropped 1/2, or 2%, to 22. (Bergen finished up 3/16, or 2%, to 8; McKesson finished up 1/4, or 1%, to 20 11/16; Phar-Mor ended up 1/8, or 5%, to 2 31/32; while Duane Reade closed down 1 13/16, or 8%, to 20 11/16.)

"It's nothing that I'm jumping up and down about," said Andrew Speller, analyst for

A.G. Edwards

. He has hold ratings on both distributors and doesn't cover the retailers. His firm co-managed a preferred stock offering for Bergen in May. "This kind of stuff happens all the time. In most other industries, people don't send out press releases when they sign supply agreements."

Both distributors have been looking for some good news this year. Bergen's stock is almost 30 points off a 52-week high of 37 3/4, and McKesson's is almost 70 points off a 52-week high of 89 3/4.

For McKesson, the deal with Phar-Mor may prove slightly more substantive than its previous arrangement with the retailer because it includes automation products, Speller said. The products -- with names like OmniLink and BakerAPS Pharmacy 2000 -- count pills and notify pharmacists if a patient's insurance won't pay for the drug his doctor prescribed.

That could increase profits at Phar-Mor by allowing the company to eliminate technicians, and the products carry a higher profit margin for McKesson, according to Speller.

"This is pretty much prototypical of what the wholesalers are trying to do," Speller said. "You make money selling pharmaceuticals on the wholesale side, but you make a lot more money offering these other services."

With the Duane Reade agreement, Bergen replaces closely held

Neuman Wholesale Drug

, of Moonachie, N.J., which had signed a $1 billion dollar multi-year agreement with the drugstore chain just last year, according to

F&D Reports

, an industry newsletter. The consignment deal had strained Neuman's working capital, so the company agreed to become a secondary distributor.

The entire deal, including Bergen's agreement to become the primary distributor, was reported by the industry newsletter on Nov. 22, almost a month before the distributors' news releases were simultaneously released on Wall Street.

Analysts said Bergen's deal is unimpressive because it follows a series of troubled acquisitions of specialty distributors by the firm.

Counsel Corp.


Stadtlander Drug

to Bergen for about $400 million in a deal announced last November. The terms included the options to buy all of Counsel Corp.'s shares of


, and Bergen purchased PharMerica in its entirety on April 26. Both have drained Bergen's earnings, and the Stadtlander purchase has sparked a shareholder lawsuit.

The specialty distributors provide drugs for prisons and nursing homes, which was a higher margin business before recent changes in federal law affected the amount the nursing homes can be reimbursed by the government, according to Michael Krensavage, analyst for

Brown Brothers Harriman

. He rates both distributors hold and doesn't cover the retailers. His firm hasn't done underwriting for any of the companies.

Under old pharmaceutical laws that were changed this year, nursing homes could be reimbursed for buying more drugs and, consequently, purchased them, Krensavage said.

"It used to be that you just pumped as many pills into grandma as possible and you got paid for it," he said. "All of a sudden grandma is not as ill and doesn't need as many pills."