McKesson to Purchase US Oncology in Deal Valued at $2.16 Billion
McKesson Corp., the biggest U.S. drug distributor, agreed to buy closely held US Oncology Inc. for about $560 million to expand in cancer care and medicines.
McKesson will pay cash for the deal, valued at $2.16 billion, including $1.6 billion in debt, John H. Hammergren, chief executive officer of the San Francisco-based company, said today on a conference call. Oncology’s community-based cancer treatment and research network operations are owned by New York- based private equity firm Welsh Carson Anderson & Stowe.
US Oncology, based in The Woodlands, Texas, will be merged into McKesson Specialty Care Solutions, a unit formed in 2008 following acquisitions of Oncology Therapeutics Network and National Oncology Alliance. The deal strengthens McKesson’s position in cancer drug distribution, said Helene Wolk, an analyst at New York-based Sanford C. Bernstein & Co.
“With new therapies coming to market and the increased incidence of the disease, oncology will be important to McKesson in terms of market growth,” Wolk said today in an e-mail. “This business is very synergistic from a distribution perspective, but it also brings clinical services such as reimbursement expertise and physician network development that should be valuable to McKesson’s distribution customers.”
McKesson will remain the second largest distributor of specialty drugs with the acquisition, trailing AmerisourceBergen Corp. in Chesterbrook, Pennsylvania. The leader has about a 55 percent share of the market, with McKesson at 16 percent and US Oncology at 9 percent, according to David Larsen, an analyst at Leerink Swann & Co. in Boston, in a note today.
US Oncology is affiliated with more than 1,300 physicians in 39 states, said Jennifer Horspool, a company spokeswoman, in a telephone call. It includes Texas Oncology, based in Dallas, with more than 240 oncologists and sites of care throughout Texas.
US Oncology provides services to affiliated doctors, who pay a fee to join. Services include access to an electronic medical records network, an oncology drug purchasing organization, reimbursement and care management, clinical research and information on new therapies and a portal that allows physicians to collaborate in real time.
The deal, expected to close by the end of the year, will be “modestly beneficial” to earnings starting in the fiscal year beginning in April, McKesson said.
“The transaction can be well supported within McKesson’s credit profile and ratings, given its high cash balances, good free cash flow generation, and the ability to reduce funding costs at US Oncology,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, in an e-mail today.
McKesson rose $1.90, or 2.9 percent, to $67.88 at 4:01 p.m. in New York Stock Exchange composite trading. The company has gained 8.6 percent so far this year.
McKesson works with about 1,000 oncologists now, providing services to for about 17 percent of all cancer patients in the U.S., Hammergren said on the call. The combined company will expand to almost 3,000 oncologists, he said.
Bruce Broussard, US Oncology’s chief executive officer, cited the push to reduce U.S. health spending in announcing the agreement. Broussard will head up McKesson’s specialty pharmaceutical unit, to be based in The Woodlands, Texas.
“With the health-care marketplace moving rapidly toward reimbursement based on quality and cost-effectiveness, our physician customers need access to deep clinical, operational and information technology capabilities to create integrated networks that continually enhance the quality of care in a cost- efficient manner,” he said in the statement. “In joining McKesson, we are building the scale and expertise necessary to empower our customer base to shape the future of health care.”
Almost 12 million Americans had cancer, as of 2007, and an estimated 1.53 million people will be diagnosed this year, according to the National Cancer Institute. People born today have a 41 percent chance of developing some type of cancer during their lives.
All of US Oncology’s debt will be refinanced or repaid, the companies said. An investor relations official at New York-based Welsh Carson didn’t immediately return a phone call today.
In the deal, McKesson was represented by New York law firm Skadden Arps Slate Meagher & Flom, while US Oncology was represented by Boston law firm Ropes & Gray, which has a long- standing relationship with Welsh Carson, according to Chris Tofalli, a spokesman for Ropes & Gray.
US Oncology was represented by investment bank Morgan Stanley and McKesson was represented by Goldman Sachs Group Inc. Both investment banks are based in New York.
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