Monday, December 23, 2013

2013 M&A Of The Year Nominee: McKesson/ Celesio

It's time for the IN VIVO Blog's Sixth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A of the Year, Alliance of the Year, and Financing of the Year. We'll supply the nominations (about a half dozen in each category throughout over the next week or so) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

McKesson’s purchase of German drug wholesaler Celesio for $8.3 billion is one of the largest deals of 2013, but that is not what puts it on the In Vivo Blog Deal of the Year map. More to the point, and the reason it should be on the radar of everyone in the biopharma industry, is its likely impact on pharma and the drivers that led it to consolidate in the first place.

Although the deal focuses on distribution and supply chain management, some of the duller aspects of an industry prone to flaunt its contribution to saving lives, it is every bit just as important to pharma’s health as the next big deal in cancer immunotherapy.

Logistics, scale and geographic reach are increasingly critical competitive advantages as unprecedented pressures put margins under the microscope, and R&D productivity  is too inconsistent to provide protection. In short, the onus is on industry to become more financially efficient. Germany-based Celesio is a leader in pharmaceutical wholesaling, with a presence in key markets in Europe and Brazil and an extensive network of several thousand retail pharmacies in those regions. McKesson is one of the world’s largest wholesalers, with a particularly strong presence in the United States, and $122 billion in annual sales. The combined company will have sales of more than $150 billion, and employ more than 81,500 workers worldwide. How's that for efficient positioning?

Quickly, the deets: McKesson is to acquire 50.01% of Celesio’s stock for €23 per share in cash from the Haneil group and acquire the rest of remaining publicly traded shares and convertible bonds through a parallel tender offer. Among other benefits, the deal will enable McKesson to recognize synergies of $275 million to $325 million by the fourth year. It will be accretive from Year One, which, because of certain German takeover laws, is likely to be fiscal year 2015, which begins April 1, 2014.

Upon completing the deal, McKesson should have the scale to provide its customers with a more efficient global supply chain and, as McKesson’s executives repeatedly have noted, global sourcing, as well as additional business services. The aim is to be a “one-stop shop for people to create global partnerships,” McKesson CEO John Hammergren told analysts on the day of the announcement in October. In pharma, the most obvious impact will therefore be on generic drug sourcing and distribution, since McKesson’s leverage over which generic version of a drug it distributes to customers will increase. Wholesalers do not have nearly as much control over brand pricing.

McKesson says it ranks number one in generic drug distribution in the U.S. The deal is the biggest and broadest of several initiated this year by drug wholesalers looking for more efficient ways of distributing and negotiating with generics suppliers. The trend started late last year, when the U.K’s Alliance Boots GMBH, Walgreen Co., and the U.S. wholesaler AmerisourceBergen Corp. struck a three-way partnership around cooperative purchasing of generic drugs. Walgreen already owns 45% of AllianceBoots and has an option to buy the rest of the company over the next three years; these two companies have an option to purchase up to 23% of AmerisourceBergen.

And the expanded network of retail pharmacies also is important in an era in which the pharmacy, both in the U.S. and abroad, is not just dispensing medicine, but also becoming more of a care provider as a lower-cost alternative to the emergency room or other providers. That may seem peripheral to business development priorities of innovative drug makers right now, but such an impression is misguided. Just ask vaccine producers and makers of diabetes drugs.

thanks to flickr user Jeremy Brooks for McKesson photo // cc

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