McKesson Exits Hospital Med/Surg Business

Sale to Owens & Minor signals greater focus on non-acute-care market.

For McKesson, it came down to a matter of focus. For Owens & Minor, it was a matter of gaining market share. And for McKesson Medical-Surgical’s IDN customers, it’s wait and see.

At press time, Owens & Minor and McKesson Corp. – both of Richmond, Va. – were preparing to close on the former’s offer to buy McKesson Medical-Surgical’s acute-care business for $170 million (including $130 million inventory). The two companies announced the deal in July, and received the Federal Trade Commission’s blessing to proceed one month later.

“We thought this was an opportunity for us to really get better and stronger in our core business, primarily by picking up an experienced sales force and some outstanding customers,” said Owens & Minor CEO Craig Smith.

What they get
With the acquisition, Owens & Minor will pick up 100 seasoned sales reps to add to its existing force of about 250, and an anticipated $800 million in sales. (McKesson’s acute-care med/surg business totals about $1 billion in sales a year. Owens & Minor executives conservatively estimated they would retain at least 80 percent of it.)

Owens & Minor will also pick up 12 distribution centers and will also convert the acute-care business from an additional 12 distribution centers. (McKesson Medical-Surgical services not only acute-care customers out of these additional 12 centers, but those centers also service the company’s physician and long-term-care customers, therefore these 12 distribution centers are not part of the deal.) The company’s products are a 95-percent match, adds Smith.

Meanwhile, McKesson Medical-Surgical stands to gain a sharper focus on what it perceives to be the higher-margin, higher-profit, non-acute-care med/surg market. “As we look across our business, we see tremendous opportunities in multiple segments, and like any corporation, we only have a fixed amount of capacity to focus our management attention, resources and investment dollars,” said McKesson Medical-Surgical President Brian Tyler. “It’s really more a case of us focusing on the markets where we think we have particular strength, as well as a matter of clarifying our vision and mission, which at this point is to be the leading alternate-site provider.”

Existing contracts honored
Under terms of the acquisition, Owens & Minor will honor McKesson Medical-Surgical’s acute-care contracts as they transfer to Owens & Minor. In addition, during a transition period, the company will contract with McKesson Medical-Surgical to provide uninterrupted service to customers, including product delivery, billing, customer service and inventory management.

McKesson Medical-Surgical was one of 17 med/surg distributors who signed distribution agreements in May 2006 with Irving, Texas-based Novation. Those agreements were scheduled to go into effect Sept. 1. The distributor represented 6.6 percent of Novation’s total business, said Novation Vice President of Contract and Program Services Larry Dooley.

At press time, Novation was recommending to its members who were McKesson Medical-Surgical customers that they re-sign with the company if they wanted to. “When the acquisition goes through, if they don’t like what they have, we’ll help move them to another distributor,” said Dooley. That said, Owens & Minor (another Novation contract-holder) agreed to abide by the terms and conditions of the McKesson Medical-Surgical agreements, he added.

San Francisco-based drug wholesaler McKesson Corp. entered the med/surg market in January 1997 when it acquired Richmond, Va.-based General Medical Corp. In November 1998, the company acquired Red Line HealthCare Corp., a distributor of med/surg supplies and services to the long-term-care industry.

In October 1998, the drug wholesaler merged with the Atlanta-based HBOC, a developer of hospital information systems. At the time, company executives felt that HBOC (now called McKesson Provider Technologies) – in addition to the company’s pre-existing drug wholesale business – would open hospitals’ doors to its med/surg offering.

“Certainly, we did leverage those [businesses] to open many doors, particularly among larger academic centers,” says Tyler. “And we have good representation among the big names in the acute-care sector. But at the same time, each business [within McKesson] has to stand on its own, and compete head-to-head with competitors. And we had a lot of good competitors in acute-care. So while [the pharmaceutical and information systems businesses] did open doors, they did not by default bring in business.” Over the past few years, McKesson Medical-Surgical’s performance in the acute-care market has been “relatively stable, growing just at or below market,” says Tyler.

McKesson will retain its Corporate Solutions group, whose mission is to represent the breadth of the company’s offerings to hospital and multihospital-system customers. “They’ll continue to focus on McKesson’s businesses in acute care, though med/surg will no longer be one of them,” says Tyler.

And even though the industry buzzed 10 to 15 years ago with the prospect of one med/surg distributor servicing an IDN’s acute- and non-acute-care sites, the fact is, McKesson Medical-Surgical stands to lose little if any non-acute-care customers because of the divestiture of its acute-care business, according to Tyler. “We don’t anticipate [the loss] to be anything material.”

Comprehensive strategy
“Our sense is that all this activity comes out of McKesson having thought through a much more comprehensive strategy on how to address the ambulatory market,” said investment analyst Chris McFadden of New York-based Goldman Sachs. Already, McKesson has the ability to offer medical products, vaccines and other pharmaceuticals, and information technology to non-hospital customers, he pointed out.

McKesson’s recent activities in the non-acute-care market include:

  • The acquisition in February 2006 of Sterling Medical Services, Moorestown, N.J., a provider of medical supplies and health management services to the home care market.
  • The April 2006 acquisition of National Oncology Alliance, a national oncology group purchasing organization, by McKesson Specialty, a division of McKesson Corp.
  • McKesson Specialty’s exclusive agreement with Los Altos, Calif.-based Altos Solutions to market and distribute an oncology-specific, Web-based EMR system.

“[McKesson] has clearly upgraded some of its disease-management capabilities, where they have shown some nice contract wins,” said McFadden.

Fast track
For its part, Owens & Minor intends to quickly introduce to its new customers its MediChoice® private-label program, OM SolutionsSM supply chain consulting and outsourcing program, CostTrackSM activity-based-management program, PANDAC® wound-closure inventory-management program, SurgiTrackSM procedural delivery program for the OR, and other programs and services, said Smith.

“Clearly, if McKesson has the pharmaceutical business in an account, we assume they’ll stay with McKesson pharmaceutical; and if they’re using McKesson information technology, we assume they’ll stay with that,” he said. “But we think the benefit to customers is this: They’ll be with a company that does [med/surg distribution] day in and day out, as its bread and butter.

“The customers we’ve talked to so far are happy with the acquisition. They see it as a good opportunity, and they see us as the natural company to have the business. Obviously, you can’t keep everybody happy. But I think we’ll keep the majority happy.”

Modest competitive advantage
The acquisition of the McKesson Medical-Surgical business by Owens & Minor “signals [that cross-marketing] med/surg products and pharmaceuticals to hospital customers is a pretty modest competitive advantage, if there’s any merit to it at all,” said McFadden. “I don’t perceive that anyone is concerned that the loss of the hospital-based med/surg business will have any negative impact on [McKesson’s] distribution franchise.”

McFadden added that the transaction “reinforces that Cardinal and Owens & Minor are the two marquee suppliers to hospitals today. They have the scale, they’re able to invest in the technology, and they’re working on private-label programs. This doesn’t mean there won’t continue to be very successful regional market participants. But if you’re thinking of the Tier 1 suppliers, and you’ve seen a chasm develop between Owens & Minor, Cardinal and the rest of the field, this action reinforces that. It’s probably not coincidental that you saw Henry Schein exit its hospital-based med/surg distribution business in the last six months.” (In March 2006, Henry Schein sold its Caligor Hospital and Extended Care divisions to MMS.)

The transition
Owens & Minor executives promise a smoother ride this time around than the one it offered following its 1994 acquisition of Greensburg, Pa.-based Stuart Medical. “Our cultures are more aligned,” said Smith, referring to McKesson Medical-Surgical and Owens & Minor.

Whereas Stuart was much more centralized than Owens & Minor, McKesson is more compatible with Owens & Minor’s decentralized approach to the customer. What’s more, Owens & Minor has committed at least 150 people – under the direction of Senior Vice President Charlie Colpo – to the project.

“The technology is so much better today,” added Colpo. “The data transfers of inventory usage and pricing are far superior to what was available [during the] Stuart acquisition.”

Though some – including McFadden – had conjectured that the acquisition would slow Owens & Minor’s penetration into the non-acute-care market, particularly diabetes care, company executives disagreed. In February 2005, the company acquired Access Diabetic Supply, a Florida-based company that provides diabetic patients supplies via mail. Since then, Access has acquired five additional small diabetic-supply companies, including one acquired in July 2006.

“[The McKesson acquisition] will not slow that area down,” said Smith. “We’re building critical mass, which is what we said we would do. We now have 136,000 customers. And there are opportunities to build out other platforms for chronic disease states that diabetic patients/consumers have.” A separate management team in Florida runs Access Diabetic Supply.