McKesson's (MCK) UDG Healthcare Deal Underscores Global Healthcare Distribution Consolidation - Fitch

McKesson Corp.'s (NYSE: MCK) planned purchase of the pharmaceutical distribution division of Ireland's UDG Healthcare underscores the continued global consolidation of healthcare distribution operations and of generic drug purchasing power, according to Fitch Ratings.

Greater scale is increasingly important for drug channel participants, particularly as it relates to purchasing generic pharmaceuticals and expansion into emerging markets. To that end, the industry trend is toward partnerships, alignment and amassing scale. Notably, merger and acquisition activity within the drug channel has been more focused on achieving scale that affords profitability enhancement than supporting otherwise low organic growth prospects in the U.S.

The UDG deal, announced today, will add to McKesson's generic purchasing power and further enhance its European pharmaceutical distribution presence, following its acquisition of Celesio in 2014. We expect more deals like the McKesson/UDG transaction will occur as drug channel participants continue to jockey for position globally. McKesson may lead in this growth strategy, given the firm's recent acquisitions and expanded contract wins. Unlike its peers, McKesson is the sole owner of the savings associated with its growing scale and generic drug purchasing power.

Whereas competitors Cardinal Health and AmerisourceBergen have become parties to purchasing joint ventures (JVs) with CVS Health and Walgreens Alliance Boots, respectively, McKesson's strategy does not require the sharing of cost savings with partners. The firm's newfound scale has allowed it to win expanded distribution agreements with number the fourth largest US drugstore, Rite Aid; post-acute care pharmacy service provider, Omnicare; and major grocer, Albertson's. Such deals support McKesson's overall profitability and have further strengthened its purchasing power as it pertains to generics.

Generic drugmakers have responded to the consolidation of their customers by pursuing mergers of their own. Teva agreed in July to acquire the generic drug unit of Allergan for roughly $40 billion. Mylan is pursuing a hostile takeover of generic and OTC drugmaker Perrigo, commencing a tender offer to shareholders on Sept. 14.

Fitch continues to believe that healthcare reform and budget constraints in developed markets, increased access to and spending on healthcare in emerging markets, and the prospect of significant profits from biosimilars will likely drive further consolidation and ongoing industry evolution within the global drug channel.

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