Thursday, October 24, 2013

McKesson Finally Snags Celesio: Analyzing the Deal

McKesson’s long-rumored acquisition of Celesio was officially announced this morning. Read the press release: McKesson Announces Agreement To Purchase Celesio To Create Leading Global Healthcare Services Platform.

The era of global drug distribution has officially arrived. The combined company will have annual revenues exceeding $150 billion and operate in more than 20 countries. Below, I provide analysis and context for the transaction, along with links to deal documents. I also speculate on Cardinal's next steps.

To help you celebrate—or lament—the deal, we are offering a special flash sale on our new 2013–14 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors. Just use the discount code CELESIO no later than Saturday, October 26, 2013.


Three pan-European wholesalers have emerged through consolidation: Alliance Unichem, Celesio, and the Phoenix Group. Each operates local subsidiaries in various countries. Beyond the Big Three, there are also hundreds of EU full-line and short-line wholesalers, along with thousands of importers/exporters. Compared with U.S. manufacturers, the EU’s have much less control over wholesaler actions. Wholesalers also benefit from much more fragmentation and fewer (or no) chains in many EU countries.

Fun facts about Celesio (from its 2012 Annual Report):
  • Celesio’s wholesaling business operates in 13 European countries and Brazil. Three countries—France, Germany, and the UK—account for 70% of the company’s wholesale revenues. In 2012, the wholesale business accounted for 84% of its revenues, but only 58% of its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The wholesale segment’s EBITDA margin was about 2.0%.
  • Celesio also operates about 2,200 pharmacies in six countries. Two-thirds of its revenues come from the UK, where it is the second-largest chain behind…Boots! It also operates pharmacies in Norway, Italy, Sweden, Belgium, and Czechoslovakia. The pharmacy segment’s EBITDA was about 8.0%.
  • Celesio has been divesting non-core businesses in what it calls a “radical strategic realignment.” These businesses include: Doc Morris (mail pharmacy), Ireland Wholesale (wholesaler), Movianto (3PL), and Pharmexx (sales and marketing services).

McKesson is acquiring Franz Haniel’s majority stake (50.01%) in Celesio, and will simultaneously launch tender offers for remaining publicly-traded shares and outstanding convertible bonds of Celesio. The total transaction is valued at $8.3 billion. McKesson expects to have operational control of Celesio early in its 2015 fiscal year, which starts on April 1, 2014.

Check out the deal website for background documents: (Subtle, right?). Here's a nice graphic of McKesson's new global footprint. (Click to enlarge.)


Here are my initial thoughts on this long-expected transaction. Feel free to add you own comments below.
  • McKesson has a solid platform for global acquisitions. Celesio has been selling off businesses, but McKesson is more likely to ramp up acquisition activity. Initially, it will target countries where Celesio operates. (See chart above.) One recent example: Celesio’s 2011 acquisition of Oncoprod, a Brazilian specialty distributor. However, McKesson will likely wait a few years to get started, until its post-deal leverage ratios come down.
  • Generic purchasing synergies are real, but modest. On today's call, Hammergren confirmed that "supply chain and sourcing" will drive cost synergies. He also repeatedly stressed McKesson's existing global sourcing capabilities, and emphasized the strengths of Celesio's current sourcing efforts. Perhaps that's why McKesson announced somewhat conservative synergy targets: “By the fourth year following the completion of the required steps to obtain operational control of Celesio, McKesson expects to realize annual synergies between $275 million and $325 million.” Hmmm...
  • ABC is right, too? In recent years, McKesson has emulated many elements of ABC’s business strategy. These include: (1) acquiring regional wholesalers that served smaller pharmacies; (2) developing a strong independent pharmacy network (Health Mart); and (3) building the second-largest specialty distribution business into the physician offices and clinic market. McKesson is now following ABC into Europe, but McKesson is the acquirer, not the acquiree or purchasing group partner.
  • McKesson finally spent its sweet foreign cash. About $1.6 billion of McKesson’s total $3.0 billion in cash and cash equivalents is held offshore, by its subsidiaries outside the United States. If McKesson had repatriated these funds for domestic use, the company would be subject to U.S. federal, state and local income tax. But this issue doesn’t affect a European shopping spree. It's another reason why McKesson was the only logical option for Haniel, Celesio’s majority owner.
  • NorthStarRx has just found a new outlet. Launched in 2008, NorthstarRx is a McKesson subsidiary that sells private-label generic drugs as a manufacturer. We estimate that in calendar 2013, the business will generate more than $500 million, up dramatically from less than $10 million in 2008. (See pages 134-135 of our latest economic report.) In addition to the expected generic buying power, Celesio can now add its heft to NorthStar sales. European generic dispensing rates are far below U.S. levels, so McKesson will benefit from any overseas generic expansion.
  • Cardinal will look for a partner. Cardinal has been focused on China and medical products. As I suggested after the Walgreens/ABC deal, Cardinal is most likely to keep calm and carry on. I’d be surprised if it pursued a deal with Phoenix Group. I would not be surprised, however, if Cardinal partnered with someone else for drug procurement. Maybe Cardinal will join Econdisc Contracting Solutions, the group purchasing organization with Express Scripts, Kroger, and Supervalu? Or, perhaps deepen its relationship with CVS Caremark? Stay tuned.


Here’s our exclusive footage of McKesson negotiating with Haniel, Celesio’s German owners. (Click here if you don't see the video.)


  1. It is very, very good to be John Hammergren.

  2. Outstanding analysis, Dr. Fein. My question to you is about importation - can McKesson bring durgs from Europe into the US? Can they negotiate with brand-name manufacturers for better deals?
    Thank you again for this site!

  3. No. Under current laws, McKesson would not be able to purchase and import drugs European suppliers. This process was contemplated during the negotiations over healthcare reform, but fortunately dropped from the legislation. (See Importation: Review Your Agreements for the then-proposed language.)

    Right now, importation is item #4,987 on the fix-it list for the U.S. healthcare system (far behind "make a $400 million website work"), so I don't expect any change to current law in the foreseeable future.

  4. CVS and Cardinal have to make a big move to keep up with McKesson and Walgreens growth. They don't have any other option but to join together or fight for Phoenix Group. These mergers will have a tremendous impact on generic prices in the US. I expect prices to continue increasing and MAC/WAC/AMP prices to be controlled by the big "two" and the 3rd to come as CVS/CARMARK/CARDINAL or the new "CCC". The market will consider these mergers as an international growth as a positive change for consumers in those countries that have price control on pharmaceuticals, but in the US it will mean that OBAMA CARE drug cost will double... !!