Pink Sheet is part of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC’s registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

This copy is for your personal, non-commercial use. For high-quality copies or electronic reprints for distribution to colleagues or customers, please call +44 (0) 20 3377 3183

Printed By

UsernamePublicRestriction
UsernamePublicRestriction

WHOLESALE DRUG INDUSTRY CONSOLIDATION COULD LEAVE ONLY 40 PARTICIPANTS BY 1995, DOWN FROM 85 FIRMS TODAY, ARTHUR ANDERSEN CONSULTANT TELLS NEDA

Executive Summary

Consolidation in the U.S. wholesale drug industry could cut the number of players in half by 1995, to between 40 and 50 from the current 85, Arthur Andersen & Co. Partner Steven Samek predicted at the National Wholesale Druggists Association annual meeting, Sept. 13-16 in Toronto, Canada. Projecting a 25% reduction by 1995 in the number of participants in wholesale distribution from 320,000 distributors to 250,000, Samek remarked: "Your industry is far in excess of that. You were at about 300 distributors in 1980. You probably are at 85 right now and it is likely that number will go down to 40 or 50." Samek pointed out that over the past five years wholesale distribution has consistently ranked in the top five and frequently in the top two in terms of consolidation over other segments of the U.S. economy. Nevertheless, consolidation activity in the wholesale drug industry has appeared to slow down somewhat in 1987, as the largest firms digest their numerous acquisitions of the 1982-86 period. The Arthur Andersen consultant presented the results of a recent study conducted for the National Association of Wholesale Distributors. Titled "Facing the Forces of Change: Beyond Future Trends in Wholesale Distribution," the study surveyed 700 experts as to what the industry would look like in 10 years. "Capacity in an industry trails sales in the growth phase [of industry development], but as things mature the capacity exceeds the market," Samek noted. "We are talking about an industry that frankly needs some restructuring and you are going through it in spades." The consultant said that drug wholesalers are probably "five to seven years" ahead of nondurable goods distributors, and "as much as 10 years" ahead of the durable goods distribution industry. "As the market fragments, different companies need different value-added services," he noted. "The industry has got to rechannel the way it looks, it has got to go to market differently and it has got to focus on different competitive advantages. In a mature industry, you change the way you go to market." Despite his vision of further consolidation, Samek still sees a niche for the small wholesale drug operation. "There is always going to be room for the small distributor," he said. "For the broader market, different characteristics are needed and the big distributor is going to serve that need, while the small distributor is going to have to focus his attention on markets that aren't as price sensitive." However, the small distribution houses face some rough sledding over the next several years, according to Samek. "Power will continue to shift from the manufacturer to the customer," he emphasized. "In the next seven or eight years the larger distributor will eventually have a slight increase in margins because of his economy of scale and the medium and smaller distributors will continue to have margin erosion." A predicted doubling of technology-related expenditures in the wholesale distribution industry through 1995 will also have an impact, Samek said. Technology expenditures will increase from the current 1-1/2% of sales to 3%. Specifically, he noted an increasing investment shift away from computerized recordkeeping systems and warehouse automation, areas where computer technology made its debut in the industry, to value-added areas such as bar coding, electronic data interchange and telemarketing, areas that will provide the next level of productivity gains. "Sales and marketing as well as the logistics area will get more of the technology budget than it has in the past," he maintained. "Sales and marketing provide value-added to the customers and the logistics area provides cost efficiency and productivity gains for the distributor himself." Wholesalers have used value-added services to differentiate themselves from competitors and thus gain market share, Samek noted, but have not been able to pass these costs on to customers. Instead they have offset value-added costs with gains in productivity. This increased investment in technology, according to Samek, will cost roughly 15% of assets compared to the current 10%, and come directly out of working capital. "On the right side of the balance sheet we are going to see more debt as opposed to equity," he remarked. "Wholesale distributors have classically been underleveraged. Some of these changes are going to have to be funded by debt because the distributor cannot generate enough cash flow." He noted that today it costs roughly 30 cents to produce about $1 of permanent sales in the industry. The investment commitment, Samek said, will also transform wholesale distribution from a low-risk, low-return industry with a great deal of stability to one that is unstable with high risks and potentially high returns. "Your mindset is going to have to change," he emphasized. "What you are experiencing now as drug distributors is that you are making these investments first. You have invested in technology, in property, in the markets and you are not yet realizing the gains, because you have passed them along to get a stable market." In its recently issued "Operating Survey" for 1986, NWDA noted that the industry-wide [FIFO-based] financial leverage multiplier, or total assets divided by net worth, continued its decline, from 2.25 times in 1985 to 2.17 times. "One could argue that an industry with the stability of drug wholesaling could increase its reliance on debt financing, particularly if interest rates remain relatively low," the survey states. "However, several factors argue for continued conservatism." Among the arguments NWDA advances for not increasing debt financing are: the possibility of sharply higher interest rates in the future; the fact that in terms of LIFO valuation, the leverage multiplier is at the high end of its historic range, which may make the industry not appear to lenders as underleveraged; the need for financial strength to withstand any future industry shake-out; and the need to increase financial leverage if sales growth continues to significantly exceed after-tax return on net worth. Overall, NWDA's Operating Survey for 1986 confirms many of Samek's observations. In the productivity area, for example, sales per employee increased almost 20% to $940,000, or about $425,000 at the smaller houses and $1.1 mil. at the larger firms. Total sales were up 18.5% for the year to $16.8 bil., or 12.6% adjusted for product price increases, as the industry distributed 67.3% of the pharmaceuticals in the U.S., up nearly six percentage points from 1983. Gross margins, however, declined 7.6% in 1986, from 8.86% of sales in 1985 to 8.19%, which operating expenses were reduced by 3.1%, from 6.17% of sales to 5.98%. As a result, the industry's operating profit margin were squeezed from 2.68% of sales in 1985 to 2.21%. "Not only is this decline an extension of the five-year trend," the survey remarked, "it appears to be accelerating." The industry's LIFO net profit margin declined from 1.18% in 1985 to 0.88% in 1986.

You may also be interested in...



Part D Discount Liability Coming Into Focus: CMS Releases Drug Cost Data

Newly released Medicare Part D data sheds light on the sales hit that branded pharmaceutical manufacturers will face when the coverage gap discount program gets under way in 2011

FDA Skin Infections Guidance Spurs Debate On Endpoint Relevance

FDA appears headed for a showdown with clinicians and the pharmaceutical industry over the proposed new clinical trial endpoints for acute bacterial skin and skin structure infections, the guidance's approach for justifying a non-inferiority margin and proposed changes in the types of patients that should be enrolled in trials

Shire Hopes To Sow Future Deals With $50M Venture Fund

Specialty drug maker Shire has quietly begun scouting deals with a brand-new $50 million venture fund, the latest of several in-house investment arms to launch with their parent company's pipelines, not profits, as the measure of their worth

UsernamePublicRestriction

Register

OM006051

Ask The Analyst

Ask the Analyst is free for subscribers.  Submit your question and one of our analysts will be in touch.

Your question has been successfully sent to the email address below and we will get back as soon as possible. my@email.address.

All fields are required.

Please make sure all fields are completed.

Please make sure you have filled out all fields

Please make sure you have filled out all fields

Please enter a valid e-mail address

Please enter a valid Phone Number

Ask your question to our analysts

Cancel