Quantifying Generic Buying Power for McKesson-Celesio

Here’s some thought-provoking follow-up data, related to McKesson Finally Snags Celesio: Analyzing the Deal.

Tom Gallucci and his team at FBR Capital Markets have updated their estimates for the biggest global drug buyers’ oral solid generic purchasing power. While ABC-Walgreens-Alliance Boots still tops the list, the McKesson-Celesio combination comes close. See the full list below.

Below, I offer some observations on the new global drug procurement landscape. Expect the most colossal conflict the generic industry has ever seen!

Here is the FBR list:

The companies don’t disclose actual purchases, so these figures are FBR estimates for oral solid generics. This table updates the figures first shown in Quantifying Generic Buying Power for ABC-Walgreens-Alliance Boots. (Sorry, I can’t share the full FBR report.)

Observations:

• Global, multi-market generic manufacturers have the most to gain from these deals. Yes, manufacturers will take a margin hit to play with the mega buyers. But if the global sellers displace competing single-market suppliers, then global buyers can provide big market share gains. I expect the big generic suppliers to start filling out their global portfolios with regional tuck-in acquisitions.

• The top two combinations—WAG-AB-ABC and MCK-Celesio—are more than twice as large as the next set. It’s not hard to imagine novel combinations. The most logical platform is Econdisc Contracting Solutions, the generic group purchasing organization with Express Scripts, Kroger, and Supervalu. Big deals have a funny way of spawning more deals…

• McKesson's synergies look even smaller. As I noted last week, McKesson has announced a somewhat conservative synergy target of $275 million to $325 million … by the fourth year. Based on FBR’s numbers, these synergy targets equate to less than 3% of FBR’s estimated total generic drug purchases of the two companies.

• WBAD's synergies are much more aggressive. Walgreens, via the Walgreen Boots Alliance Development (WBAD) joint venture, is still projecting $1 billion in synergies by 2016. See Breaking WBAD: An Update on Walgreens-Alliance Boots Synergies. Of course, we don’t really know how Walgreen computes these synergy numbers. As Ross Muken at ISI Group reminded me, Walgreens suggested about $500M in pre-ABC synergies. Thus, WBAD's synergy target (as a % of purchases) is more than double the McKesson-Celesio target.

• Brand makers should be a teeny bit worried. Since brand-name drug distribution is so different between the U.S. and EU, I expect minimal changes to manufacturers’ current channel strategies. But companies with both brand and generic products could be pressured by the global buyers’ efforts to achieve purchasing synergies.

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P.S. Yes, King Kong vs. Godzilla was a real movie. Does anyone else miss mid-1970s UHF channels?