Originally published on Sep 26, 2017.
The largest pharmaceutical distributor in the world is rumored to be looking at a new acquisition target: Masters Pharmaceutical represents not just increased volume (15,000 pharmacies!) but also synergy and a new business model for McKesson.
Many are quick to throw out Masters Pharmaceutical’s due to a colorful history. Their past issues with the DEA are well documented; Masters’ DEA Registration was recently revoked, and, with it, their ability to distribute controlled substances. Additionally, they have had some history with grey market products.
So why would McKesson even consider Masters? Let’s take a look at past acquisitions for the Big 3.
Past Big 3 Acquisitions
Each of the Big 3 have added many different revenue streams over their history; some examples below:
Major/Rugby (HDG) – Cardinal Health
Northstar RX – McKesson
Good Neighbor Pharmacy – Amerisource Bergen
Specialty Pharmacy Distribution
Metro Medical, Raintree Oncology and Sonexus Health – Cardinal Health
Vantage Oncology and US Oncology – McKesson
ABSG (ASD Healthcare, Besse Medical, ICS, IntrinsiQ, ION Solutions, Oncology Supply) – Amerisource Bergen
DIK, Borschow and Kinray – Cardinal Health
McQuery and D&K – McKesson
Other spaces entered by the Big 3 include pharmacies, GPO’s, pharmacy administration service organizations, medical supply (distribution& manufacturing), radiopharmaceuticals, and much more.
However, McKesson has never focused an acquisition in two spaces: secondary generic drug distribution and third-party logistic (3PL) services.
A list of McKesson’s 2017 acquisitions demonstrates their proclivity towards technology, pharmacies and full-line distributors.
Value Proposition 1: Secondary Generic Drug Distribution
Secondary generic drug distribution is how pharmaceutical distribution gets closer to becoming truly commoditized. In this space, price is the most important aspect to making deals. There are hundreds of companies that have carved out niches across the country by guaranteeing lower prices than the Big 3 on very specific portfolios.
Cardinal Health made a major move into the space with ParMed in 2006, purchasing the company for $40M; the ParMed then had revenues of $53M. Amerisource Bergen followed suit in 2007 with Bellco, purchased for $190M on revenues of $2B.
Although they often have they may have the best pricing available, dispensers find it frustrating that the Big 3’s secondary distributor presence (ParMed/Bellco) has better pricing than their primary distributor counterparts (Cardinal/ABC). However, that is because the Big 3’s pricing finally comes to light; through “Most Favored Nation” clauses, vertical deals (Cardinal & CVS, QBA & Amerisource Bergen)
With a Masters Pharmaceutical acquisition, McKesson will be able to leverage River City Pharma, a sales division of the company established in 2012 focusing on secondary generic drug distribution.
Value Proposition 2: 3PL
Masters has built a reputable company in RXTPL. In just five years, they are already claiming many big-name manufacturers as clients and even pulling clients from long-standing industry heavyweights such as Dohmen Life Science Services. RXTPL delivers both traditional services (logistics and EDI) as well as value-add services (graphics/marketing support, real time reports and government contract support). The facility was newly constructed and occupied in August, 2016. Storage space allows for all ranges of cGMP temperature and humidity standards. This facility could be a great addition to McKesson’s in-house attempt at 3PL which was started in July 2014.
Value Proposition 3: MORE VOLUME
With the (reduced) WBA & Rite-Aid deal closing, McKesson is losing revenue; this may be putting pressure on the top brass at McKesson to offset those losses as soon as possible.
With the deal reported to close as early as November 2017, I am sure we will hear more information soon!