Cardinal Health Buys Harvard Drug Group: Perspectives on Wholesaler Consolidation

Cardinal Health does it again! This morning, it announced the acquisition of Harvard Drug Group (HDG) for a cool $1.115 billion. Read the press release.

HDG, with revenues of about $450 million, was one of the larger second-tier drug wholesalers. Given HDG’s current private equity ownership and current leadership, a deal was inevitable.

Cardinal Health’s multi-year acquisition spree has made it the buyer of choice for smaller drug distributors. See my deal list below. I suspect many folks at next week’s HDMA meeting will be asking: Who’s next?

SOME INDUSTRY CONTEXT

As I discuss in the 2014-15 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, three companies generate about 85% to 90% of all revenues from drug distribution in the United States—AmerisourceBergen Corporation (NYSE:ABC), Cardinal Health, Inc. (NYSE:CAH), and McKesson Corporation (NYSE:MCK).

In addition to these three companies, there are a number of key industry participants. Here are some other large wholesalers:

• Morris & Dickson
• H.D. Smith
• Smith Drug
• Curascript Specialty Distribution—owned by PBM Express Scripts
• Anda Distribution—owned by drug maker Actavis
• NC Mutual Wholesale Drug
• Rochester Drug Cooperative

Other regional and specialty wholesalers include: BDI Pharma, Burlington Drug, Dakota Drug, FFF Enterprises, King Drug, Miami-Luken, Seacoast, and Value Drug. There are also thousands of smaller companies (including some pharmacies) that are licensed by U.S. states as wholesalers.

The smaller, non-Big Three full-line drug wholesalers play important industry roles:

• They are the primary wholesale suppliers for some smaller retail and non-retail customers.

• They provide a secondary supply source for the Big Three wholesalers’ customers, especially independent retail pharmacies and small chains.

• They often focus on a subset of the market, such as a geographic region or a specific product category—for example, generic drugs or blood products.

CARDINAL'S BUYING SPREE

In recent years, Cardinal Health has made a series of acquisitions focused on growing its core pharmaceutical distribution business with smaller pharmacies and physician offices. These include:

• Parmed Pharmaceutical (2006)
• The F. Dohmen Co. (2006)
• Borschow Hospital and Medical Supplies (2008)
• Kinray (2010) , FYI, this deal led to one of my all-time favorite posts about Stewart Rahr (A Tale of Two Wholesaler CEOs) 
• DIK Drug (2012) 
• Metro Medical (2015) 

In 2010, private equity firm Court Square Capital Partners bought Harvard Drug from another private equity firm, H.I.G. Capital. (Details here.)

Those with long memories may recognize Court Square partner Kurt Hilzinger, who was once President and COO of AmerisourceBergen. Since February 2015, Kurt has also been interim CEO of HDG.

Harvard Drug Group was particularly strong in the generics business, and even has its own private label generics brand (Major Pharmaceuticals). HDG also has an eclectic set of smaller businesses. See the list on their web site.

With the public wholesalers’ stock prices at all-time highs, they are willing to go shopping. Who else is ready to sell?