Fitch: Position Trumps Growth in U.S. Drug Distributor M&A
Merger and acquisition activity in the drug distribution space continues to be more a function of positioning versus growth, according to Fitch Ratings.
U.S. drug distributors AmerisourceBergen Corp., Cardinal Health Inc., and McKesson Corp. (the Big Three) have consummated M&A deals primarily for the purpose of positioning within the healthcare market versus expansion. Together, the Big Three control roughly 95% of the U.S. drug distribution market.
A relatively mature and consolidated U.S. drug market poses potential growth difficulties for the Big Three. We believe acquisition strategies will likely be driven less by a desire to augment tepid near-term organic growth and more to establish or enhance a position in an adjacent or related market to secure future growth. Several deals in line with this aim have closed recently, including McKesson's purchase of US Oncology, Cardinal's purchases of Kinray and Yong Yu, and AmerisourceBergen's acquisitions of TheraCom LLC and World Courier Group, Inc. Additionally, McKesson's US oncology acquisition marked a huge step for the company to become a major player in the specialty distribution market.
We note that many of the smaller acquisition deals have had only a slight impact on financial metrics for buyers, but all of the purchases hold important future growth and strategic value in a rapidly changing healthcare market.
On Thursday, prescription drug distributor McKesson Corp. announced it would purchase medical and surgical supply company PSS World Medical Inc. for about $2.1 billion. Uncertainty surrounds McKesson's future decisions in keeping all of PSS's business lines, as some will mark new areas of focus for the company. However, if they do hold them in their entirety, we believe this would underscore the company's leaning toward strategic positioning.
The announcement was made in tandem with McKesson's second-quarter results.
Drug distributors are also focusing on their relationships with especially biopharmaceutical manufacturers, looking to strengthen their marketing, commercialization, and other consulting service offerings in order to improve their position within the specialty drug channel.
AmerisourceBergen, with its dominant specialty distribution business (we estimate 50% to 55% share of the market) and already relatively established consulting services arm, appears to be leading the charge in this regard. The company's purchase of World Courier is an appropriate example of positioning with manufacturers while also providing a platform for growth in the base distribution business. However, Cardinal and McKesson are also working with increasing vigor to position them within the specialty drug channel so as to most benefit from future market growth.
We expect this trend will continue with distributors executing future transactions in a measured and responsible manner, mindful of maintaining their solid credit profiles.
For more information on this topic, please see our special report, "Navigating the Drug Channel: Drug Distributors: A Deeper Dive," available at www.fitchratings.com
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Jacob Bostwick, +1 312-368-3169
Corporate Finance, Healthcare
Kellie Geressy-Nilsen, +1 212-908-9123
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Brian Bertsch, +1 212-908-0549