McKesson’s deal to buy Ireland’s UDG Healthcare reflects the global consolidation of health care distribution, as drug wholesalers continue their drive for scale, especially in the realm of generic drugs, according to Fitch Ratings.
“The UDG deal will add to McKesson’s generic purchasing power and further enhance its European pharmaceutical distribution presence, following its acquisition of Celesio in 2014. We expect more deals like the McKesson/UDG transaction will occur as drug channel participants continue to jockey for position globally,” Fitch observed.
“McKesson may lead in this growth strategy, given the firm’s recent acquisitions and expanded contract wins. Unlike its peers, McKesson is the sole owner of the savings associated with its growing scale and generic drug purchasing power.”
Fitch noted that while Cardinal Health and AmerisourceBergen have become part of purchasing joint ventures — with CVS Health and with Walgreens Boots Alliance, respectively — McKesson’s moves don’t require it to share cost savings with partners.
What’s more, McKesson’s increased scale has helped it land expanded distribution pacts with Rite Aid, the third-largest U.S. drug store chain; post-acute care pharmacy service provider Omnicare; and Albertsons, one of the largest retail pharmacy operators in the U.S.
“Such deals support McKesson’s overall profitability and have further strengthened its purchasing power as it pertains to generics,” Fitch said.
“Greater scale is increasingly important for drug channel participants, particularly as it relates to purchasing generic pharmaceuticals and expansion into emerging markets,” the ratings firm explained. “To that end, the industry trend is toward partnerships, alignment and amassing scale. Notably, merger and acquisition activity within the drug channel has been more focused on achieving scale that affords profitability enhancement than supporting otherwise low organic growth prospects in the U.S.”
The consolidation wave also has hit generic drug makers, Fitch pointed out, citing Teva’s $40 billion deal to buy Allergan’s generics unit and Mylan’s hostile bid for Perrigo.
“Fitch continues to believe that health care reform and budget constraints in developed markets, increased access to and spending on health care in emerging markets,” the ratings firm stated, “and the prospect of significant profits from biosimilars will likely drive further consolidation and ongoing industry evolution within the global drug channel.”