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FOXMEYER's HOSPITAL SUPPLY BUSINESS WILL SOAR TO ANNUALIZED RATE OF $175 MIL

Executive Summary

FOXMEYER's HOSPITAL SUPPLY BUSINESS WILL SOAR TO ANNUALIZED RATE OF $175 MIL. in fiscal 1986, from 1985 revenues of about $8 mil., the company told analysts at Robertson, Colman & Stephens' medical conference in San Francisco Oct. 17. The increase will be driven by a major prime vendor supply contract FoxMeyer recently signed with Voluntary Hospitals of America. That agreement alone will be worth "close to $200 mil." when it matures, FoxMeyer President William Tauscher said. Hospital supplies currently account for less than 10% of FoxMeyer's business, with 90% of 1985 revenues coming from drug distribution, Tauscher noted. The company tapped into the supply end of distribution about two years ago with its purchase of a small Denver business, he explained. By January 1986, that initial investment will have grown to 10 facilities handling about 5,000 hospital products, he said. FoxMeyer is based in Aurora, Colorado. FoxMeyer expects to do "$100 mil. to $150 mil." in hospital supply business next year "over and above the VHA contract," Tauscher said. The hospital supply segment, while currently not profitable, "clearly" will be a contributor to income in 1986, Tauscher said. For the fiscal year ended March 31, FoxMeyer reported net revenues of $717.1 mil., with net income of $9 mil. FoxMeyer's hospital supply strategy focuses on group purchasing -- marketing a joint service of both pharmaceutical and hospital supply products, Tauscher continued. The wholesaler does not market to individual hospitals. In addition to the VHA agreement, FoxMeyer has "secured a series of other group contracts," he said. The company is targeting buyer groups that are currently served by large national distributors such as American Hospital Supply Corporation. That type of national, computerized operation can carry expense margins of 18% or 19%, Tauscher pointed out, compared with FoxMeyer's 8% operating cost level. "Further, we think because there is a tremendous amount of hospital supply product that goes direct, ]and[ the manufacturer didn't want to pay the 18% or didn't want to distribute through their competitor ]American Hospital Supply[, that product will become available to the kind of system we and some other people are setting up," he said. FoxMeyer is one of nine distributors which recently signed agreements with VHA. VHA also has contracted with Owens & Minor, which values its contract at $60 mil. to $80 mil. in annual sales over the next three years ("The Pink Sheet" Oct. 14, p. 10). The total value of the nine agreements is estimated at $300 mil. for the first year.

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