Monday, May 14, 2012

BREAKING NEWS: Cardinal Health to Acquire DIK Drug

In today's sorta surprising (but not really) M&A news, Cardinal Health (NYSE: CAH) has signed a letter of intent to acquire regional wholesaler Dik Drug. No press release yet, so consider this post to be another Drug Channels exclusive. (The news was confirmed to me by Cardinal's SVP of Public Relations.)

This deal is one more step in the long-running consolidation of the U.S. pharmaceutical distribution business. It also helps further boost Cardinal's business with smaller pharmacies. Dik is a closely-held and fairly secretive private company, so there's no official data on revenues, but most likely less than $2 billion. [UPDATE: I have learned that revenues are actually below $500 million.]

Industries do not consolidate forever (even drug wholesaling). Given the limited number of possible buyers and the pharmacy industry's pace of change, I expect that the remaining regional wholesalers will be looking for a reasonable exit strategy over the next few years, too. Read on for some additional background.

In recent years, Cardinal has been the busiest buyer of regional wholesalers. Recent acquisitions by Cardinal Health have focused on growing its core pharmaceutical distribution business with retail independent pharmacies. Key purchases include Parmed Pharmaceutical (2006), The F. Dohmen Co. (2006), Borschow Hospital and Medical Supplies (2008), and Kinray (2010). For an overview of historical acquisition activity by the big wholesalers, see the company profiles in chapter 6 of the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

Dik is also an investor in Third Party Station a.k.a. Pharmacy First, a wholesaler-owned Pharmacy Services Administrative Organization (PSAO) with about 2,500 members. Most independent pharmacy owners rely on a PSAO to negotiate and administer contracts between a PBM and groups of independent pharmacies.

TPS is owned by Wholesale Alliance LLC, which itself is jointly owned by the following regional drug wholesalers: Burlington Drug, Dakota Drug, DIK Drug, King Drug, Kinray, NC Mutual, Rochester Drug Co, Smith Drug, and Value Drug. Two of those nine wholesalers have now been acquired by Cardinal. [UPDATE: A Kinray representative asked me to clarify that Kinray exited the Wholesale Alliance following the Cardinal acquisition.] Cardinal operates LeaderNET, a PSAO with about 2,000 pharmacies. Hmmm...

P.S. Want to totally geek out on the history of pharmaceutical wholesaling from the 1700s through the mid-1990s? Then check out my 1998 academic article Understanding Evolutionary Processes in Non-Manufacturing Industries: Empirical Insights from the Shakeout in Pharmaceutical Wholesaling. Plenty o' jargon!

2 comments:

  1. A Wholesale GuyMay 14, 2012

    Amazing how you report the news before the news!

    I'm at a regional wholesaler. We always pick up business when one of the big guys buys a local competitor. So I say, let's have more consolidation! We can beat the big 3 on service anytime.

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  2. Good point. There are certainly viable niches in any consolidating industry. Nevertheless, business owners (and their families) have to consider the environment and decide when to cash out.

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