Enhancing the Distribution of Specialty Medications through Targeted Mergers and Acquisitions

Value-added services for specialty drugs can help distributors support otherwise slim profit margins.

As many industry insiders know, pharmaceutical revenue will shift from brand-name drugs to specialty over to next few years. As a result, increased competition is encouraging market entry. For existing specialty companies looking to grow their businesses, adding a marketing strategy that includes specialty drug support services may prove to be increasingly lucrative.

The best way a drug distributor can secure future growth is by enhancing “a position in an adjacent or related market,” according to an October 2012 report from Fitch Ratings. This strategic value can be added to a distribution company through the acquisition or bolstering of specialty-focused supporting entities.

According to report authors, the 3 biggest drug distributors—AmeriSourceBergen Corp, Cardinal Health Inc, and McKesson Corp—control nearly 95% of the drug distribution market in the United States. The best way for distributors like these to grow their businesses is to expand their respective distribution services to include specialty drug—related service offerings such as marketing, commercialization, and consulting. Acquisition of such entities allows distributors to vertically integrate aspects of the care process into their business models.

“What we have seen distributors doing more of recently is expanding or establishing their positions in these niche, support-type roles within the drug channel such that they become more valuable to their customers—both upstream and downstream—beyond the core drug distribution services they provide,” Jacob Bostwick, associate director at Fitch Ratings, told Specialty Pharmacy Times. “It’s also a margin play; these services offer distributors a chance to support their very slim profit margins and increase cash flows.”

Incorporating supportive care services into product systems enhances a distributor’s position within a specialty drug channel, according to the commentary by Fitch Ratings. The authors pointed to recent mergers and acquisitions (M&A) from the “Big Three” to illustrate how these collaborations typically work: McKesson’s purchase of US Oncology, a physician practice management and drug distribution company for oncologists, helped them capture share in specialty drug distribution; Cardinal’s purchases of Kinray and Yong Yu, which helped the company expand its reach nationally and internationally; and AmeriSourceBergen’s acquisitions of TheraCom LLC and World Courier Group, Inc, which allowed the company to further develop its consulting, patient access support, and reimbursement enterprises. AmeriSourceBergen’s purchase of World Courier, wrote the authors, “is an appropriate example of positioning with manufacturers while also providing a platform for growth in the base distribution business.”

By adding complementary offerings to their distribution functions, distributors add value and help them expand patient access to new therapies. Bostwick noted that distributors will continue to look for ways to establish or expand their presence in the various niches of distribution, and this expansion will continue to be highly dependent upon the drugs that emerge from the R&D pipelines of pharmaceutical manufacturers. “Cardinal may need to use M&A to expand in United States specialty distribution,” noted Bostwick, “but AmeriSourceBergen and McKesson likely have the scale necessary already to expand their presence in certain areas of specialty distribution organically.”