Dow Jones Newswires -- July 15, 1998
Wall St. Pondering HBO's Next Move After
McKesson Talks End
By LOUIS HAU
Dow Jones Newswires
NEW YORK -- The surprising revelation that HBO & Co. (HBOC) was in
merger talks with drug wholesaler McKesson Corp. (MCK) has unsettled
industry observers, who are now anxiously wondering what health-care
information systems provider might do next.
HBO's trolling for an acquisition wasn't at all surprising. After all, the Atlanta
company is expected to increase its earnings by 30% or more during the next
three years by continuing its aggressive strategy of buying up competing
information-systems companies and integrating them effectively to make them
quick contributors to growth. Analysts see HBO posting revenue of more than
$1.5 billion this year, a three-fold increase from its reported sales in 1995.
But why talk to McKesson? Although the San Francisco company does have
a pharmacy-information systems subsidiary, its overall business operates at
much lower margins and growth rates than HBO. In addition, McKesson is
primarily a distributor of drugs and other medical supplies to retail pharmacies,
hospitals, physician offices and other health-care providers.
As reported earlier, HBO and McKesson announced that they had been in
merger talks but terminated them Tuesday.
While the merger of two such different companies would appear to make little
sense on the surface, market observers said they can understand some of the
motivations that may have brought the two sides to the negotiating table.
HBO is now a much larger company than it was a few years ago, so it will
now have to complete bigger deals in order for them to be meaningful to
earnings growth, said BancAmerica Robertson Stephens & Co. analyst
Michael Samols.
And McKesson may have viewed merging with a health-care information
systems company as an opportunity to branch out into a potentially
margin-expanding business, said HKS & Co. analyst Hemant Shah.
HBO's shares opened at 35, up from Tuesday's closing price of 32 1/16, then
headed south again. Investor sentiment initially was, "'Oh good, it's not going
to happen,' and then they thought, 'Wait, it almost did happen,"' said CIBC
Oppenheimer Corp. analyst Benjamin Rooks.
Following an 11.2% drop to 32 1/16 Tuesday, HBO fell as much as 8.4%
earlier but recently was at 32 5/8, up 9/16, or 1.8%, on Nasdaq volume of 28.9
million, compared with a daily average of 3.2 million.
McKesson's NYSE-listed shares was up 3/4, or 0.9%, at 87 3/8 on volume of
456,900. Average volume is 322,900.
HBO and McKesson officials couldn't be immediately reached for comment.
HBO may have thought that combining drug distribution with its arsenal of
information systems could have put it in a better position to influence
prescribing patterns to minimize drug costs, BancAmerica Robertson
Stephens' Samols said. He noted that pharmaceutical expenses have been a
major thorn in the cost-containment efforts of HMOs and other health-care
payors.
While pursuing such a strategy could make sense, Samols said he wasn't sure
that McKesson was the ideal vehicle with which to do so. In addition to selling
drugs and medical supplies to institutional customers, McKesson also provides
retailers with non-prescription health-care and beauty products, a business
that doesn't fit with HBO's information capabilities, he said.
McKesson, like other drug wholesalers, has been seeking ways of boosting
profit margins in what is has been a low-margin business. Margins have been
squeezed as the industry consolidates. The sector has continued in this
direction with McKesson's proposed merger with AmeriSource Health Corp.
(AAS) and Cardinal Health Inc.'s (CAH) proposed acquisition of Bergen
Brunswig Corp. (BBC), although both deals are being opposed by the Federal
Trade Commission.
While McKesson Chief Executive Mark Pulido has done an admirable job of
improving margins, "there's only so far you can go" in drug wholesaling, HKS'
Shah said.
Because of these realities, other drug distributors have been branching out into
other related fields. A prime example is Cardinal Health, which has recently
completed a string of acquisitions in non-distribution areas. In May, the
company agreed to buy drug-delivery company R.P. Scherer Corp. (SHR),
which has an agreement with Pfizer Inc. (PFE) to develop a faster-acting
version of the impotence drug Viagra.
During the last few years, Cardinal has also purchased Pyxis Corp., a
provider of automated-dispensing systems for drugs and medical supplies;
Owen Healthcare Inc., a provider of institutional pharmaceutical management
services; Medicine Shoppe International Inc., a franchiser of independent
pharmacies; and PCI Services Inc., which provides packaging services for
drug companies.
McKesson itself took a smaller step in this direction with its 1996 acquisition
of Automated Healthcare Inc., a maker of drug-dispensing equipment for
hospitals.
- By Louis Hau; 201-938-5240; louis.hau@cor.dowjones.com
Briefing Book for: HBOC | MCK
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