AmerisourceBergen Gets Early Thumbs Up
By VITA REED
So far, so great.
That’s the early verdict from Wall Street on AmerisourceBergen Corp., the drug distributor that came about from Valley Forge, Pa.-based AmeriSource Health Corp.’s August buy of Orange-based Bergen Brunswig Corp.
Last week, shares in AmerisourceBergen were up 20% since the start of the year, with much of the gain coming in recent weeks. Rival Cardinal Health Inc. was up just 4% on the year while McKesson Corp. was flat.
AmerisourceBergen, which distributes healthcare products to hospitals, drugstores, supermarkets and others, counted a market value of nearly $8 billion last week.
The company’s profits nearly tripled in the March quarter, handily beating estimates in a way not seen since the go-go days of two years ago. Minus $2.9 million in acquisition charges, AmerisourceBergen earned $94.7 million for the quarter, or 87 cents a share, vs. a consensus estimate of 75 cents a share.
“Twelve cents is just an astounding beating of expectations in one quarter,” said Jon Green, an analyst with Dresdner Kleinwort Wasserstein in New York. “I think they even surprised themselves. They definitely surprised a sell-side analyst like myself and buy-side investors.”
Company officials and analysts cite savings and economies of scale from the Bergen deal for the strong profit showing.
AmerisourceBergen officials said they expect integration to result in an overall operating savings of $150 million by the end of fiscal 2004.
And they say they see more gains coming: the company raised its profit projection for the 12 months ending Sept. 30 from $3 to $3.15 per share.
“We not only beat consensus, but then we also raised our estimate going forward,” company spokesman Michael Kilpatric said.
The results stand out at a time when big corporate combos, including AOL Time Warner Inc., are under fire.
As expected, though, AmerisourceBergen’s gains have come with costs in Orange County, which lost its No. 2 public company by sales in the deal. Bergen’s former Orange base has seen its share of layoffs in the integration. And the power center in what was billed as a merger of equals is tilted more toward AmeriSource than some might have expected.
But, so far, the combined company seems to have sidestepped many of the jinxes that befall big deals.
“They proved to a lot of people that (the combination) made sense,” analyst Green said.
Eric Coldwell, an analyst with Prudential Securities, wrote in a recent research note that he sees gains from the deal sticking.
“We believe that strong growth, rising returns and solid cash flow will remain the norm,” he wrote.
AmerisourceBergen’s Kilpatric said the company was “capturing synergy cost-savings earlier than anticipated,the Street, I’m sure, was glad to hear that.”
“We completed (our) information technology bridge ahead of schedule in March, which allowed us to close the first cross-company integration of distribution centers,” he said.
The company consolidated a distribution center from AmeriSource into one that came with Bergen Brunswig. Both are in Phoenix.
Developing the technology bridge was the responsibility of Linda Burkett, Amerisource-Bergen’s chief information officer and a key Bergen Brunswig holdover.
“This bridge allowed us to take an order entry from an AmeriSource customer and fulfill it in a former Bergen supply warehouse system,” Kilpatric said.
“Distribution center consolidation will create a world-class distribution network, in our view,” said Sean Wieland, an analyst with WR Hambrecht + Co.’s Boston office in a research note.
Citing the Phoenix combination, Wieland said, “Lessons learned here will be applied to the consolidation of four more distribution centers by the end of the fiscal year, for a total of seven distribution center closures in fiscal year 2002.”
AmerisourceBergen also plans to build six new distribution centers and expand others, for a total of 30 centers, post-integration.
Those activities, coupled with other factors, “gives the investor community confidence that a, the merger is moving along very effectively; that we are capturing cost savings that everyone’s looking for,” Kilpatric said. “That’s a question that is always out there when someone looks at a merger,are they really going to get what they say they’re going to get?”
Meanwhile, the final fate of Ameri-sourceBergen’s distribution center just across the county line in Corona, which came with Bergen Brunswig, still hasn’t yet been decided, Kilpatric said. The facility’s high level of automation is a factor in its favor, he said.
Another merger-related landmark cited by Kilpatric was a new employee benefits package that will start July 1.
“In that package, we were able to get a better deal on than we had thought we would, so that adds to the synergies,” he said.
AmerisourceBergen has around 13,000 workers companywide. Officials have emphasized that the drug distribution company will continue to have a presence in Bergen Brunswig’s former base in Orange, which counts 620 workers, down from 700 last year.
“Staff reductions are continuing at a very moderated rate,” Kilpatric said. “There’s a few that come along each time. The main thrust on that will take place when we start consolidating larger facilities in years two and three.”
He added: “There will be a substantial work force at the Orange office in IT and other functions for some time.” ns
