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Why Drug Distributors Are Buying Cancer Specialists
Can't be good for the docs who didn't make bank off the buyout.
"Drug middlemen are duking it out to buy their customers.
Most Americans pick up their prescription drugs at the local pharmacy, but many pricey medications are bought directly by medical providers. Think, for example, of a chemotherapy infusion delivered at a doctor’s office. The intermediaries selling drugs to those doctors run a pretty good business. Now, the big three U.S. drug wholesalers—McKesson MCK 1.92%increase; green up pointing triangle, Cencora COR 0.46%increase; green up pointing triangle and Cardinal Health CAH 0.51%increase; green up pointing triangle—are taking control of the doctors, too, to lock them in as customers.
The trend isn’t exactly new. Back in 2010, McKesson bought US Oncology for $2.16 billion. But what was once a side hustle has now expanded into an all-out turf war, with all three distributors getting in on the action, driving up the prices of their targets. Part of that has to do with the scarcity of assets left to buy. Last year, Cencora partnered with TPG Inc.to TPG 0.31%increase; green up pointing triangle purchase OneOncology for $2.1 billion, and McKesson in August acquired a unit of Florida Cancer Specialists & Research Institute for $2.49 billion. Earlier this month, Cardinal jumped in for the first time, acquiring Integrated Oncology Network for $1.12 billion. After the recent flurry of acquisitions, the list of available large cancer-specialist networks has pretty much dried up.
The acquisitions have transformed the drug middlemen into vertically integrated medical providers. McKesson now has about 3,000 medical professionals across 700 locations, making it one of the largest oncology-practice managers in the U.S., according to Citi. OneOncology, in which Cencora has a 35% stake, has 1,000 such providers in 350 locations, it notes. They are all chasing after oncology for a reason: Cancer care makes up an increasing portion of health spending.
About 70% of oncologists are aligned with a hospital or health system, according to Ryan Langdale, a senior partner at The Chartis Group, a healthcare consulting firm.
The competition among drug distributors is raising some eyebrows on Wall Street as distributors seem to be overspending to protect their turf. “First impression was the deal makes sense and par for the course,” Baird analyst Eric Coldwell wrote of the McKesson Florida deal. After investigating further, he wrote, the firm was “growing less convinced about valuation.” Stephanie Davis, an analyst at Barclays, wrote that the price reflected a “scarcity of high quality assets at scale,” noting that McKesson’s rivals were also initial bidders.
Distributors are paying through the nose because whoever controls the doctors gets to tap into all sorts of fees, explains Langdale. But it is also a matter of eat or be eaten. “For drug wholesalers, either they align with medical oncologists, or their competitors can,” Langdale says."
