AC­QUI­SI­TIONS:

McKes­son builds port­fo­lio with US On­col­ogy deal

Modern Healthcare - - Contents - Andis Robeznieks

For those who still needed con­vinc­ing, McKes­son Corp. re­cently pro­vided $2.16 bil­lion worth of ev­i­dence il­lus­trat­ing how the health­care in­dus­try is driv­ing the nation’s econ­omy. That’s how much money the San Fran­cisco-based phar­ma­ceu­ti­cal and in­for­ma­tion technology mega­com­pany is spend­ing to ac­quire US On­col­ogy. Based in the Wood­lands, a Hous­ton sub­urb, US On­col­ogy boasts more than 1,300 af­fil­i­ated physi­cians pro­vid­ing care for 700,000 can­cer pa­tients at 496 lo­ca­tions in 2009.

Ob­servers are won­der­ing if there will be a cul­ture clash with McKes­son en­ter­ing the provider arena. But dur­ing a Nov. 1 con­fer­ence call with in­vestors, McKes­son CEO John Ham­mer­gren said the com­pany plans to con­tinue the US On­col­ogy busi­ness model of af­fil­i­at­ing with, rather than em­ploy­ing, the physi­cians in its work­force. “We do not plan to ever own providers,” Ham­mer­gren said.

At least one US On­col­ogy physi­cian, Ni­cholas Vo­gelzang, chair and med­i­cal di­rec­tor of Com­pre­hen­sive Can­cer Cen­ters of Ne­vada, noted how he ex­pects the deal to help him main­tain an in­de­pen­dent prac­tice.

“The US On­col­ogy model is hos­pi­tal-in­de­pen­dent—this al­lows us to stay that way for a long time,” Vo­gelzang said.

In ad­di­tion to ben­e­fit­ting from McKes­son’s phar­ma­ceu­ti­cal dis­tri­bu­tion prow­ess, Vo­gelzang said, doc­tors in the US On­col­ogy net­work are ex­pect­ing McKes­son to up­grade US On­col­ogy’s iKnowMed can­cer-care elec­tronic health record. He said it pro­vides strong an­a­lyt­i­cal and de­ci­sion-sup­port tools but also can slow work­flow with it “clunky” data-en­try pro­ce­dures.

Un­der terms of the deal, which is ex­pected to close by Dec. 31, McKes­son will as­sume US On­col­ogy’s out­stand­ing debt of some $1.6 bil­lion and will ac­quire about $155 mil­lion in tax cred­its from op­er­at­ing losses “to be used in the fu­ture by McKes­son,” Ham­mer­gren said dur­ing the con­fer­ence call. McKes­son de­clined to pro­vide a rep­re­sen­ta­tive to be in­ter­viewed for this ar­ti­cle.

Ham­mer­gren said McKes­son will pay “$400 mil­lion or so in cash off the bal­ance sheet” and add about $1.7 bil­lion to its own ex­ist­ing debt—first in the form of a short­term bridge loan and then some form of per­ma­nent fi­nanc­ing. He added that the deal is be­ing done at time that is typ­i­cally the low point in the com­pany’s cash cy­cle—but “in no way taps out our abil­ity to de­ploy cap­i­tal.” McKes­son’s growth and fi­nan­cial strate­gies of port­fo­lio ex­pan­sion and stock re­pur­chas­ing are ex­pected to con­tinue, he said.

“The ac­qui­si­tion makes great fi­nan­cial sense for our share­hold­ers and will be a source of earn­ings growth al­most im­me­di­ately,” Ham­mer­gren said.

US On­col­ogy will come un­der McKes­son’s Spe­cialty Care So­lu­tions busi­ness, which will now be based in the Wood­lands and be led by US On­col­ogy Pres­i­dent and CEO Bruce Brous­sard, who will re­port to Paul Ju­lian, McKes­son’s ex­ec­u­tive vice pres­i­dent and group pres­i­dent. Be­cause of this ar­range­ment, Roy Bev­eridge, US On­col­ogy ex­ec­u­tive vice pres­i­dent and med­i­cal di­rec­tor, said there will be no cul­ture clash be­tween the two com­pa­nies’ re­spec­tive work­forces.

“What’s hap­pen­ing is that McKes­son has a great num­ber of on­col­ogy as­sets, and US On­col­ogy is stay­ing in Hous­ton, Texas, and a lot of these as­sets are mov­ing from San Fran­cisco to Hous­ton,” Bev­eridge said. He noted that em­ploy­ees and af­fil­i­ates of US On­col­ogy will still work for the same CEO, and the com­pany name also is stay­ing the same. “So, the cul­ture will re­main that of US On­col­ogy.”

Al­most 1.5 mil­lion peo­ple are ex­pected to be newly di­ag­nosed with can­cer in 2010, ac­cord­ing to Ham­mer­gren.

Ham­mer­gren: “We do not plan to ever own providers.”

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