Tuesday, June 26, 2012

McKesson Downplays European Wholesaling Expansion

Last Tuesday’s Walgreens-Alliance Boots deal creates a $111 billion (pro forma) global pharmacy/wholesale company. About one-quarter of the new company's revenues will come from non-US drug wholesaling, primarily in Europe.

Coincidentally, McKesson held its annual Investor Day meeting on the very same day. Chairman and CEO John Hammergren downplayed any European expansion, implying that McKesson’s capabilities equal or exceed what’s across the pond. He also offered an intriguing rhetorical question about scale. Full quote below.

BTW, many people have asked me to comment further on last week’s Walgreens-Alliance Boots deal. Rather than posting to Drug Channels, I have provided a special report exclusively to Pembroke Consulting's clients. Sorry to disappoint.


Here's a brief overview of the drug wholesaling market in the European Union (EU).

Three pan-European wholesalers have emerged through consolidation – Alliance, Celesio, and Phoenix Group. Each operates local country subsidiaries. Beyond the Big Three, there are also hundreds of EU full-line and short-line wholesalers, along with thousands (?) of importers/exporters.

Here’s the world according to GIRP (The European Association of Pharmaceutical Full-Line Wholesalers):

Compared to the US, EU manufacturers have much less control over wholesaler actions.
  • Like pharmacies, wholesale sell-side margins (to pharmacy customers) are regulated in most EU countries. Some countries, e.g., France, also regulate the discount % from these margins that wholesalers can offer to pharmacy customers.
  • Parallel trade is a major source of wholesaler buy-side margin. Wholesalers and Importers/Exporters absorb more than 80% of price differences between EU countries. See Importation Illusions
  • Relationships are (somewhat) less contentious because pricing for both manufacturers and wholesalers are controlled by a common government payer.
Direct-to-Pharmacy (DTP) and Reduced Wholesaler Agreements (RWA) have partially replaced the traditional wholesale model.
  • In a DTP model, the wholesaler operates as a fee-for-service logistics provider. Wholesalers do not own inventory. Pharmacies are direct customers of the manufacturer, not the wholesaler. DTP is most common in the UK. For example, Pfizer uses Alliance as its sole DTP agent, while Astra Zeneca uses Alliance as one of 2 UK DTP partners. See Behind the Scenes of Pfizer UK
  • In a RWA model, the pharmaceutical manufacturer limits the number of wholesalers that can purchase its products. However, the wholesalers in the network still own inventory and set the price to the pharmacy (subject to regulation).

McKesson held its 2012 Investor Day meeting last week. Click here to download the slides or listen to the webcast.

When asked about the Walgreen-Alliance Boots deal, Mr. Hammergren was very diplomatic in his response. Rather than commenting on the wisdom (or lack thereof) behind Walgreen’s acquisition, he shared a comparative perspective on the European wholesaling market, saying:
“Paul and I had in fact have all spent a significant amount of time in Europe evaluating the distribution models that exist there and other markets and also the capabilities and companies that have emerged in these markets from the logistics and from an IT perspective. And I don't believe there's any intellectual power that comes from other markets that would be superior to what we've already been able to develop at our own markets in terms of the delivery.”
This makes sense to me. As I note above, the EU market is fundamentally different from the US marketplace. Back in 2010, McKesson was rumored to be looking at Phoenix Group. (See Is McKesson in the hunt for an EU acquisition?) The Merckle family reportedly chose not to sell Phoenix after Teva paid $5 billion for Ratiopharm.

He also mused aloud about the diminishing returns to global scale:
“Scale matters. But how much does even greater scale matter? And I think those are the other questions that have to be asked is when we think about expanding our footprint, how much sourcing power does it give us beyond what we are today?”


  1. AnonymousJune 26, 2012

    Excellent and useful article.

    Now let me ask you the question in reverse: will any of the european wholesalers buy one of the Big 3 in the US?


  2. I suppose anything is possible these days, but its seems very unlikely due to valuation.

    Celesio is public, but controlled by a private holding company (Haniel). As near as I can tell, its market cap is ~$2.1B USD. Phoenix is privately held. Alliance Boots will be part of Walgreens.

    The market caps for the U.S. big 3 are:
    Mckesson = $21.5B
    Cardinal = $14B
    ABC = $9.6B

    Unless there is a private equity firm involved, an outright acquisition by an EU wholesaler would be near-impossible.


  3. PhexpressJune 26, 2012

    Not exactly Adam.

    Look at Teva and review their distribution program....and of course, not of just their line. 

  4. I'd be truly stunned if Teva, which already has a debt-to-EBITDA ratio greater than 4:1, acquires one of the Big 3 US wholesalers.