Friday, October 05, 2007

Fresh Consolidation in the Oncology Channel

McKesson (MCK) just announced a deal to buy Oncology Therapeutics Network (OTN) for $575 million.

Although the move looks like nothing more than a horizontal distribution acquisition, it actually represents the ongoing vertical consolidation of the specialty channel. And as the channels to the non-retail customer gets narrower, combined distributor-GPO entities gain leverage.

Owning the Customer

After this deal closes, the two largest community oncology GPOs for physician practices will be under common ownership of specialty products distributors. Such forward integration makes it virtually impossible for a manufacture to bypass and sell directly to the customer -- because the distributor and the customer are the same company!

AmericourceBergen (ABC) uses this strategy to great success. ION, the largest community oncology GPO, has a prime vendor distribution arrangement with Oncology Supply. Both organizations are part of AmerisourceBergen’s Specialty Group, which has accounted for almost all of the entire company’s revenue growth over the past five years.

Did you know that more than 40% of Amgen's (AMGN) U.S. sales go through ABC? McKesson and Cardinal Health (CAH) combined represent less than 30% of Amgen's U.S. sales.

The acquisition of OTN now links McKesson with Onmark, which I estimate to be the second largest community oncology GPO behind ION. Note that McKesson also acquired National Oncology Alliance, a small GPO, in April 2006.

Unanswered question: where does this deal leave Cardinal Health (CAH)? They sold their oncology distribution business to OTN last year and became a minority owner in OTN’s parent company Oncology Holdings, Inc. No word yet on their role, if any, in the new organization.

No More DIY Logistics

Another observation – OTN moved to self-distribution in June ’06 by announcing that UPS Supply Chain Solutions would be handling distribution for their oncology network members. I presume that this logistics deal will be unwound and the volume moved to McKesson.

If so, it represents further evidence of wholesalers’ strength in smaller, high service customers such as physician offices and clinics. Large retail chains can (and increasingly do) use their own warehouses to bypass wholesalers. In contrast, smaller customers genuinely benefit from the services provided by a wholesaler and are much more difficult for a manufacturer to serve directly, even with the help of a third-party logistics company.

BTW, this trend is being repeated in many industries outside health care. In my new book Facing the Forces of Change®: Lead the Way in the Supply Chain, I surveyed manufacturers from a range of industries about their perceptions of logistics companies versus wholesalers. (If you have the book, see Exhibit 3-4.) The past 3 years have not noticeably advanced the perceived competitiveness of third-party logistics providers versus wholesalers compared to a similar survey that I conducted in 2003.

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As I predicted back in January, consolidation within the U.S. pharmaceutical infrastructure – the network of companies that facilitate dispensing and payment of pharmaceuticals -- keeps moving ahead.

3 comments:

  1. OTN does not UPS for distribution they own their own facility in TN. It used to be the CAH specialty facility and was part of the deal in the CAH sale. They USE UPS(brown) as shipper vs. Fedex.

    ReplyDelete
  2. You are correct that OTN have their own facility.

    But OTN also made this announcement in June 2006:

    OTN Partners With UPS for Distribution of Specialty Pharmaceuticals to Community-Based Oncology Practices

    That's why UPS Supply Chain Solutions Louisville location is listed as the ADR (on behalf of OTN) with certain manufacturers.

    Adam

    ReplyDelete
  3. OTN made an investment Cancer Centers of Excellence (CCE)(a group of 21 independent community oncology practices). I wonder if that ownership will be transferred to Mckesson in the transaction?

    As John Amos, OTN President, was reportedly let go from Mckesson prior to his joining OTN, I wonder what his fate will be?

    ReplyDelete

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