Cardinal Health's bold bid for Allegiance Corp. will put the concept of one-stop shopping for hospitals' purchases to its most thorough test yet.
News of Cardinal's $5.4 billion deal for Allegiance stunned many of the more than 500 hospital executives, suppliers and purchasing honchos at the annual meeting of the Health Industry Group Purchasing Association in Orlando, Fla., last week.
"It can't be so: Cardinal buying Allegiance?" said Robert Schuweiler, longtime director of materials management at Group Health Cooperative of Puget Sound, Seattle, and now a vice president for the Premier hospital alliance. Saying what many at the meeting seemed to be thinking, Schuweiler quickly answered his own rhetorical question: "But it is so, and our whole world has changed."
Dublin, Ohio-based Cardinal announced plans to buy Allegiance, McGaw Park, Ill., earlier this month (Oct. 12, p. 6). They expect the deal to close during the first half of next year.
Thwarted by antitrust regulators in its bid for No. 3 drug distributor Bergen Brunswig Corp., Orange, Calif., Cardinal is now jumping into medical-surgical distribution. The new strategy represents a turnabout for Cardinal, which has downplayed its own modest medical-surgical operation-called James W. Daly and primarily a player in the Northeast-in favor of expanding the range and depth of pharmaceutical services it offers to hospitals nationwide.
With Allegiance in tow, Cardinal would have an unprecedented smorgasbord of goods and services to tempt hospital buyers. Only time will tell, however, whether such wall-to-wall convenience is appealing enough to snare more business from hospitals than Cardinal and Allegiance could separately.
"There are very loud arguments on both sides whether using the same company for med-surg and pharmaceuticals has any great benefits," said Michael Bohon, director of materials management at Tucson, Ariz.-based TMC Healthcare. "Nobody has really shown me that there is much financial benefit to it that will drop to my bottom line."
Nevertheless, Cardinal isn't the first to give combined drug and medical-surgical distribution a chance.
Drug distribution giant McKesson Corp., San Francisco, pushed the proposition of one-stop shopping onto center stage last year by buying General Medical, a privately held medical-surgical distributor, for $775 million. This spring, McKesson's move won the endorsement of Columbia/HCA Healthcare Corp., which dropped medical-surgical specialist Owens & Minor, Richmond, Va., in favor of a comprehensive sole-source arrangement for drugs, medical-surgical supplies, consulting services and pharmacy automation from McKesson.
But because the complex deal is being phased in over several years and comes at a time when Columbia is in the midst of its own major restructuring, the results of McKesson's one-stop approach remain to be seen.
Already, the siren song of synergy has led others to stumble. Earlier this month, Bergen Brunswig said it would take a pre-tax charge of about $100 million for its fourth quarter ended Sept. 30, primarily because of disappointing results at its medical-surgical distribution unit. About $87 million covers a write-down of goodwill from acquisitions whose carrying value has been impaired by their performance below Bergen's expectations at the time of purchase. In a restructuring move, Bergen will take $3 million in charges to close four medical-surgical distribution facilities and lay off about 55 employees.
No matter how integrated or brawny suppliers might be, distribution is a tough business. Margins for the box-moving middlemen are thin whether the supplies being delivered to hospital loading docks are drugs or medical-surgical products.
Generally, drugs are easier to distribute because each box of product is standardized and carries a high value. By contrast, medical-surgical supplies encompass everything from bulky packages of disposable diapers to ultraexpensive coronary stents that are smaller than postage stamps. And unlike drugs, medical-surgical products don't have a set of universal product codes. More than 20 years of jawboning among vendors and materials managers haven't solved the coding problem, hindering automation and complicating inventory management.
Until recently, different cultures and logistical challenges have helped divide drug and medical-supply distribution. But the rapid resculpting of the distribution landscape by Cardinal and McKesson is breaking traditions. Speculation is now swirling that other companies will have to make some moves to keep up with the merged Cardinal and Allegiance.
"McKesson and Bergen Brunswig have to think through what their strategic responses are to this combination," said Robin Young, an analyst with Stephens, a Little Rock, Ark.-based investment bank.
The deal for Allegiance has thrust Owens & Minor, the next largest independent medical-surgical distributor, into the spotlight.
Shares in Owens & Minor rose more than 35% in the week after Cardinal announced its bid for Allegiance.
The run-up is Wall Street's friendly way of saying that Owens & Minor is now in the enviable position of being the company most likely to be acquired next.
"We're always evaluating the situation," said Hugh Gouldthorpe, a company vice president."Right now it's business as usual, and we're just trying to do the best we can for our customers."
Whether Owens & Minor remains independent, which is management's previously stated intention, or is eventually gobbled up by a larger competitor, the emerging mega-distributor appears to be a new fact of healthcare life.