Friday, January 26, 2007

3 Ways for Drug Wholesalers to Grow

All three big wholesalers -- AmerisourceBergen Corp (NYSE:ABC), Cardinal Health Inc (NYSE:CAH), and McKesson Corp (NYSE:MCK) -- posted strong results this week. But as Heather Won Tesorio points out in today’s Wall Street Journal: “All of the so-called ‘Big Three’ are reassessing their businesses and making efforts to return to their roots” in drug distribution. (See Cardinal, Refocusing on Core, Sells a Unit.)

There are very few wholesalers left to acquire in the U.S. So how could wholesalers grow their distribution businesses faster than market growth?

Here are three possible strategies that I am tracking, in order of riskiness:

1. Vertical integration -- Vertical integration would allow growth within drug distribution by giving wholesalers more control over their customer’s sourcing decision. This is already happening with the integration of oncology care and specialty products distribution. (See The 3PL vs. Wholesale battle heats up.) As I noted a few weeks ago, I also would not be surprised to see a Big 3 drug wholesaler acquire or merge with an acute care GPO. (See 2007 Trends: Integration (1 of 4).

2. Europe -- In my very first blog post last May, I speculated about a merger between a US and a European drug wholesaler. (See US wholesalers look to Europe.) You probably don’t recall the post because I only had about 3 readers back then. It's still a possibility, especially if the importation bill moves ahead.

3. China -- The Chinese government has been talking about consolidation for a few years now. This article caught my eye yesterday: China's wholesale drug channels to experience major changes. Foreign companies are already making inroads there. Interpharma, part of European company Zuellig Pharma, is the largest foreign company in the Chinese market right now. Beijing Med-Pharm is a US-based company that has been acquiring Chinese distributors. Is there a place for a U.S. wholesaler in China? Perhaps, although one Asian executive told me that the regulatory/political environment and business ethics in other parts of the world would be a big hurdle for the Big 3.

None of these strategies will be easy to execute, but all three reflect logical next steps for the drug wholesaling industry.

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