DrugMax, pharmacy chain merge DrugMax said it hopes to gain new pharmacy customers; Familymeds will inherit a larger product line.
By SCOTT BARANCIK
Published March 23, 2004
CLEARWATER - DrugMax Inc., a Clearwater company that distributes medicine to pharmacies, is merging with a Connecticut pharmacy chain.
In an unusual deal unveiled Monday, Familymeds Group Inc. of Farmington will become a DrugMax subsidiary, but backers of the Connecticut company will obtain a majority stake in the combined entity, and Familymeds' chief executive will lead it.
Both companies extolled the potential synergies of the all-stock deal, valued at $55-million to $60-million. DrugMax said it hopes to gain new pharmacy customers, greater buying power and a higher stock price. Privately held Familymeds, which operates 82 specialty pharmacies in or near hospitals and medical centers, will inherit a larger product line, discounted product and the perks of being publicly traded.
The deal won't come cheaply for DrugMax:
- Familymeds' investors will acquire a combined stake of as much as 62 percent, leaving existing DrugMax investors with 38 percent.
- Familymeds chief executive Ed Mercadante will serve as CEO and co-chairman of the new company while his chief financial officer stays in that post. DrugMax CEO Jugal Taneja will become the other co-chairman while DrugMax president and chief operating officer Bill LaGamba keeps his titles.
- Though Clearwater would remain DrugMax's official headquarters, its new CEO and CFO would continue to live and work in Connecticut. DrugMax has 80 employees nationwide, about 14 of them in Clearwater. Familymeds has 820 employees.
But DrugMax executives shrugged off the issue of control.
"We are the largest shareholders," LaGamba said. "If we strengthen the company with greater earnings potential, theoretically the price of your stock grows accordingly, and allows you to do acquisitions with cash and stock."
In fact, barring regulatory objections or a last-minute change of heart, a vote on the merger should be anticlimactic.
Between them, top DrugMax executives exercise voting power over nearly half of the company's stock. LaGamba also expects investors who purchased 1-million shares in a $3.2-million private placement last week to support the deal, given that they made the purchase even after the planned merger was disclosed to them confidentially. LaGamba said the 14 investors were so enthusiastic about the merger that they asked to up their purchase to 3-million shares but were turned down.
Nevertheless, DrugMax intends to mail a proxy statement in April and host a shareholder vote before closing the deal in June.
DrugMax and its distribution subsidiaries will keep their existing names, while its newly acquired pharmacies will still be called Familymeds Pharmacy. (In Connecticut, the pharmacies are called Arrow.)
To date, Wall Street has ignored DrugMax; no analysts monitor its stock. The company didn't help itself in 2003 when it lost $13.2-million, or $1.85 per share, on revenues of $291.8-million. It distributes pharmaceuticals and over-the-counter drugs from about 400 vendors to pharmacies.
Familymeds sells medicine directly to roughly 400,000 patients a year through retail pharmacies, mail order and the Internet. Most of its customers suffer from one or more chronic medical conditions, such as diabetes and AIDS, and take a number of expensive drugs.
By merging with DrugMax, the pharmacies will obtain the same drugs more cheaply, and will have more medications to market to physicians. DrugMax, in turn, will gain a new customer (the Familymeds pharmacies) and increase its bulk purchasing power.
Familymeds CEO Mercadante, a licensed pharmacist, said joining a publicly held company will give his company access to new capital. It also should help build the pharmacy network, which currently includes 82 locations in 14 states. Seven of the pharmacies are in Florida, including three in Orlando.
"Today, there's thousands of medical sites throughout the country, but not that many pharmacies on site for the patients," he said. "There really isn't a national competitor doing the same thing we are, to the best of my knowledge."
The deal calls for DrugMax to distribute 11.5-million shares to the various investors that own Familymeds, including ABS Capital Partners of Baltimore and UnitedHealthcare of Minneapolis, the top two. Familymeds' top executives also will receive stock options and restricted stock.
Both companies said the merger would create a combined entity with annual revenues of about $400-million. In a conference call Monday afternoon, executives said they were eager to seek new financing.
Initial investor reaction to the was positive. The deal was announced in the morning, and DrugMax's stock closed for the day at $4.59 per share, up 30 cents, or 7 percent.
