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Executive Summary

Pharmaceutical sales, as a percentage of total wholesaler revenues, continued to increase in 1987, rising from 76.41% in 1986 to 78.79%, the National Wholesale Druggists Association (NWDA) notes in its most recent Operating Survey. "Latest figures indicate that the wholesale drug industry is now handling over 70% of the pharmaceutical products moving to market," the survey states. "Its penetration of hospital accounts and its capture of an increasing share of what had been direct manufacturer end-user distribution is dramatic testimony to the industry's unequaled operating efficiency." The gain in prescription drug sales came at the expense of OTCs, toiletries and "other" products, which each declined fractionally. Sales of durable medical equipment and home health care products as a share of industry sales stablized at about 1.1%, according to NWDA. Total wholesaler sales increased 16.8% in 1987 to just over $ 19 bil. Discounting for inflation, NDWA reported that the industry sustained real sales growth of 9.4%. Profitability, as measured by after-tax return on net worth (RONW), snapped a four-year declining trend in 1987, rising from 9.7% to 12.8%. The Operating Survey cites four factors contributing to the upswing in RONW. First was a slight increase in the industry's operating profit margin, from 2.2% of sales in 1986 to 2.3% in 1987. Second, and probably most important, the industry's effective income tax rate declined almost 10 percentage points. As a percentage of sales, taxes decreased from 1.1% to 0.9%. Third, total asset turnover increased, from 3.9 times in 1986 to 4.1 times. "Average collection period decreased by one day and fixed asset utilization continued to improve," the survey states. Finally, the amount with which firms used debt financing remained essentially unchanged. The industry's debt conservatism is reflected in the survey's statement that "it's hard to borrow your way to success." Despite the move toward increased profitability, however, the trend toward declining gross margins continued in 1987. The industry's gross margin fell just over half a percentage point, to 7.6% of sales. NWDA noted that the decline in 1987 was similar to that in previous years, adding that the much anticipated flattening has yet to occur. "One of the reasons underlying the 1987 margin shrinkage is the increasing emphasis on lower-margined hospital sales," the survey explains. "This is one of the factors that helped the industry achieve a very attractive decrease in operating expenses from 5.98% of sales in 1986 to 5.28% in 1987." By trimming operating expenses at a faster rate than the decline in gross margin, the industry was able to show a slight gain in operating profit margin. NWDA estimates a total of just over $ 15 bil. for the wholesale prescription drug distribution business in 1987. Drug wholesalers did over $ 4 bil. in OTCs, toiletries, sundries and durable medical equipment. The three largest U.S. drug wholesalers -- McKesson (including Alco), Bergen Brunswig and FoxMeyer -- account for more than 60% of the total wholesaler market. McKesson, which is completing the acquisitions of Alco Health Services and Northwestern Drug, expects its annual health distribution revenue to increase from $ 5.2 bil. to $ 7.5 bil. Number two Bergen said it expects to report fiscal 1988 revenues of $ 3.5 bil., while FoxMeyer, which is completing its third wholesaler acquisition since being purchased by National Intergroup, will shortly have drug distribution revenues approaching $ 2 bil.

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