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BERGEN BRUNSWIG SEEKS MINIMUM $240 MIL. OR 10% CORPORATE SALES GROWTH THROUGH ACQUISITIONS IN FY 1986, MARTINI TELLS ANALYSTS; WHSLR's VOLUME SHOULD PASS $3 BIL.

Executive Summary

Bergen Brunswig is looking to add at least $240 mil. in sales to its operation through acquisitions in fiscal 1986, Chairman and CEO Emil Martini Jr. told security analysts at an Oct. 28 meeting in New York City. "Bergen Brunswig's general objective is growth of 25% annually," Martini said. "Through internal improvement and market expansion we aim for 15%, the remaining 10% to be achieved through acquisitions." Figured into the wholesaler's reported $2.4 bil. sales volume in fiscal 1985 (year ended Aug. 31), this growth target should push the firm over the $3 bil. mark in 1986. During the last year, Bergen Brunswig completed acquisitions of the Allen Company of Orlando, Florida, California-based Synergex and Davis Brothers Drug of Denver, with combined annual sales of $510 mil. The company noted in its recently issued annual report that the acquired companies contributed approximately 52% of Bergen's sales gain for the fiscal year, which was up from $1.7 bil. in fiscal 1984. Underscoring the trend toward consolidation that has been taking place throughout the wholesale industry, Martini pointed out that the five largest drug wholesalers now have a combined market share approaching 55%, with Bergen's about 15.6%. "The pattern of consolidation is continuing," he added. "We believe that drug wholesalers by the year 2000 will have an 85% market share." He noted that wholesalers currently account for roughly 65% of pharmaceutical products distributed. Asked whether he thought the company's merger pace would abate in light of a diminishing body of potential worthwhile acquisition candidates, Martini responded: "I'm not sure that I agree that there are very few ]companies[ left worth buying. Some of the bigger ones, of course, have been absorbed. But I think that there are a significant number out there that are good acquisitions, very viable companies that will blend well with our strategy. I'm not saying that we can acquire as much dollar volume as we did in 1985, but I would hope that we would be able to have an aggressive acquisition program in 1986." Martini indicated that the thrust of Bergen's acquisition effort would continue to focus on areas in which the firm is already involved, i.e., pharmaceuticals, medical/surgical supplies and consumer electronics products. "I think the only time we might look at something different is if we felt the value-added services to the party brought by the acquisition would enhance our base business, or if we felt the value-added services that we were producing from our base business would significantly enhance the other business," he explained. "It would also have what we consider to be a reasonable stability of earnings base so it would work well with our existing business." A year ago, the company began negotiations for the purchase of National Intergroup. Bergen Brunswig scuttled the deal last April after the steelmaker restated its 1984 earnings downward and reported sagging earnings during the first quarter of 1985. Describing the aborted acquisition as a "very, very unique" situation, Martini emphasized that Bergen is not currently "out looking to make some wild acquisition that's totally foreign to what we are doing." According to the annual report, Bergen Brunswig Drug Company sales were $1.9 bil. in fiscal 1985 and accounted for nearly 80% of total corporate volume. More than half of the 41% increase over 1984 sales came from acquisitions, with the balance generated through internal growth. As in the rest of the industry, hospitals continue to take on greater importance in the Bergen Brunswig customer base. According to Martini, hospitals represent 23% of the firm's customer mix but generate 30% of its drug sales. "The hospital segment is growing at a much faster rate than any other," Martini noted. Bergen's hospital business was greater than the industry average of 18.6% of sales, as reported by the National Wholesale Druggists Assn. in its 1984 "Operating Survey" ("The Pink Sheet" Sept. 2, p. 8). A big contributor in the increased hospital business, the annual report notes, is Bergen's agreement in July with Humana to supply pharmaceuticals and hospital supplies to the hospital chain's 87 institutions ("The Pink Sheet" July 22, T&G-6). "The contract, the first in the industry between an investor-owned hospital chain and a distributor, is expected to contribute more than $200 mil. in sales over its three and one-half year life," the report states. "Another growth area for Bergen Brunswig is the movement toward health maintenance organizations (HMOs) and preferred provider organizations (PPOs)," Martini added. "The (Bergen Brunswig) Drug Company has contracts with six of the top ten HMOs." He indicated that these new types of facilities, along with emergicenters, surgicenters and food/drug combos will tend to offset any threat posed by mass merchandisers moving into the drugstore business with self-distribution systems. Martini indicated that the company's emphasis in the generics area has been to sell these products in larger sizes, i.e. packages of 500 and 1,000 as opposed to 100s. He explained that with average margins approximately the same for both trademark brands and generics, handling only the larger size packages prevents a diminution in earnings that would result from the lower unit price for the generic products. He said that generic drugs make up approximately 5% of the firm's pharmaceutical sales. According to Martini, Bergen Brunswig has temporarily discontinued doing business with secondary sources pending further clarification of the drug diversion issue. "I would say that any reduction in margin that we might take as a consequence would be more than offset by more aggressive purchasing against price increases," he commented. "Secondly, it costs more from an administrative point of view to do business with secondary sources than it does with the primary sources." Asked how he thought the one-price policy recently announced by Merrell Dow and Searle will effect Bergen, Martini replied, "Since very little of our business is done with ]drug[ chain warehouses I would not expect that kind of policy change to affect us." The annual report notes that after a flat 1984, medical/surgical supply sales rose 49% to $245.5 mil. in fiscal 1985, with approximately 78% of the volume increase stemming from the Synergex acquisition. "As far as the outlook for margins in the medical supply is concerned," Martini predicted, "I think they will continue to be under pressure just as they have been in drugs over the years." He noted that while census figures in acute care hospitals have been down, the bulk of the company's sales increase during the last six months has been in these facilities. Summarizing future drug pricing trends and their effect on Bergen Brunswig, Martini predicted: "I think gross margins will continue to go down. I think our operating expenses will continue to go down, and my only hope is that our operating expenses continue to go down faster than margins."
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