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VHA SUPPLY IS GOING TO PURCHASE MORE THAN $ 600 MIL. PER YEAR IN DRUGS FROM NINE WHOLESALERS AS "AGENTS OF THE COMPANY": NEW AGREEMENTS ANNOUNCED SEPT. 9

Executive Summary

VHA supply is going to channel over $ 600 mil. per year in pharmaceutical purchases through nine wholesalers as part of a series of "authorized distribution agent" agreements announced Sept. 9. After a six-month review of its drug purchasing system, VHA supply is paring down the number of its pharmaceutical distributors from 16 to 9. VHA Supply, a subsidiary of Voluntary Hospitals of American, said in a recent release that its hospitals purchased $ 464 mil. in pharmaceutical products in 1987. VHA projects drug purchases to tota $ 600 mil. this year, indicating an annual growth rate in excess of 30%. If VHA continues that rate of growth, the hospital group's drug volume would top $ 750 mil. in 1989. The six-year agreements with the nine authorized agents will be phased in from Sept. 12 to Oct. 31. The nine distribution agents include the largest four wholesalers in the U.S., Bergen Brunswig, FoxMeyer, McKesson, and Alco Services, as well as five regional distributors. All of the agents, except south Bend Drug, were part of VHA's previous distribution system (see box below for the nine "agents" and previous "prime vendor" distributors). As part of the reorganization of its distribution network, VHA is changing its description of the selected wholesalers from "prime vendors" to "agents of the company." As agents of VHA, the distributors have more responsibility for sales, service and mainenance of inventory, VHA explained. The authorized distribution agent (ADA) arrangement gives VHA "more influence" over the distributors "in the methods of conducting business with VHA hospitals," VHA said. The ADA agreements will "also assure availability of VHA = Plus branded products," VHA stated in the release. One of the new agents, the Krelitz subsidiary, Twin City Wholesale, notes that under the new agreement it will be required to fill more orders for VHA + Plus products and review the inventory of products on a weekly basis. The dstribution agent agreements also reportedly include price control mechanisms. Under the new agreement, hospitals that participated in the previous program will not face price increases. Additional incentives for VHA hospitals to use the agents will offer savings for increased volume of orders and reduced time between purchase orders. The agent wholesalers will be required to tie into a computer system that VHA is developing to enable the ADAs to process orders directly from the hospital pharmacies. VHA will also require the ADAs to set up a back order relay system with another agent within six months from the effective date of their contracts. The impact of VHA's increased business for the agents may be substantial. Twin City Wholesale, for example, expects to service an additional eight hospitals under the new contract. Twin City previously supplied 40 VHA hospitals; the new total will be 48. The addition of the eight hospitals, which are located in Wisconsin, will extend Twin City Wholesale's distribution area into Wisconsin for the first time. The drug wholesaler primarily operates in Minnesota, North Dakota and South Dakota. Twin City Wholesale projects sales to VHA of $ 25 mil. in its fiscal 1989 year through the end of April. Twin City Wholesale has been a supplier for VHA for four years, during which it has done approximately $ 80 mil. in business with the hospital supply company. The distributor said that it has supply contracts with other drug purchasing groups, including: two networks of non-profit hospitals, Health One and Amerinet; a group of teaching hospitals, University Hospital Consortium; and health maintenance organizations. Twin City said it had prime vendor agreements with 210 hospitals prior to the VHA contract. The VHA contract comes at a propitious time. Twin City Wholesale is replacing a major supply contract with Synder Drug, which was recently rebid and moved to FoxMeyer ("The Pink Sheet" July 4, 1988, T&G-12). the Snyder contract generated over $ 15 mil. in annual revenues for Twin City in the last year before being moved. The Minneapolis wholesaler, with total fiscal 1988 pharmaceutical sales of $ 162 mil., did nearly $24 mil. (in drugs and sundries) with another major customer, Dayton Hudson Corp. Another of the regional agent wholesalers for VHA Supply, Durr-Fillauer, will sell pharmaceuticals to 130 VHA hospitals, almost double the 65 hospitals that it currently works with under the previous contract with VHA. The new agreement is expected to reap over $50 mil. in additional annual revenues for Durr-Fillauer, bringing total sales under the agreement to about $120 mil. in 1989, the company said in a recent release. In the New England, New York and Pennsylvania region, Cardinal Distribution estimates its sales to VHA at $ 60 mil. in the first year and up to $ 130 mil. per year when the program is fully implemented ("The Pink Sheet" Sept. 12, 1988, "In Brief"). One of the previous distributors that was not chosen, owens & Minor, said that VHA's decision should not affect the company's medical-surgical supply agreement. Earlier this year, Owens & Minor renewed its "evergreen" medical/surgical supply agreement with VHA ("The Pink Sheet" March 7, 1988, T&G-10). VHA itself is going through a major organizational shift. On Sept. 14, the company announced the resignations of its two top execs (VHA Chairman Don Arnwine and VHA Enterprises President Thomas Reed). Two acting CEO's were named as replacements (VHA Exec Committee Chairman Wade Mountz at VHA and Enterprises Chairman Allen Hicks at the for-profit subsidiary). The VHA board reportedly may study whether VHA Supply should be realigned under the for-profit subsidiary). The VHA board reportedly may study whether VHA Supply should be realigned under the for-profit subsidiary. VHA SUPPLY's CONSOLIDATED WHOLESALE DRUG DISTRIBUTION SYSTEM The following chart outlines the consolidation of VHA's drug distribution network, under which the hospital supply group has selected 8 of its 16 previous distributors, and one new distributor to become agents of the cmpany. The chart was complied by "The Pink Sheet" from information suppplied by VHA Suply. Authorized Distribution Agents of VHA Supply Alco Health Services, Wayne, Penn. Amfac Health Care, Folsom, Calif. Bergen Brunswig Drug, Orange, Calif. Cardinal Distribution, Dublin, Ohio Dur-Fillauer Medical, Montgomery, Ala. FoxMeyer, Carrollton, Tex. McKesson, San Francisco, Calif. South Bend Drug, South Bend Ind. * (FOOTNOTE) * South Bend Drug was not part of VHA's previous drug distribution system.(END FOOT) Twin City Wholesale Drug, Minneapolis, Minn. Previous Prime Vendors of VHA Supply [These 8 firms were previously prime vendors for VHA. They may have declined to bid on the new arrangement, merged (Zahn, into Foxmeyer), or bid but not been selected.] Commons Brothers, Elmsford, New York F. Dohmen, Germantown, Wisc. Harris Wholesale, Solon, Ohio J. E. Gold, Portland, Maine Louis Zahn, Melrsose Park, Ill. Owens & Minor, Richmond, Va. Smith Wholesale Drug, Springfield, Ill. Walker Drug, Birmingham, Ala.

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