McKesson Shares Zoom on Speculation That It’s a Takeover Target : Health care: Analysts say the drug distributor’s PCS unit is the big attraction for potential investors.
As merger mania grips the health care field, shares of McKesson Corp. rose sharply Monday on speculation that major pharmaceutical makers are sizing up the San Francisco-based drug distribution giant.
McKesson’ shares soared $5.625, or 7.8%, to $77.875 on the New York Stock Exchange on very heavy volume of 659,500 shares.
The surge in McKesson’s stock came a day after a London newspaper reported that Britain’s Glaxo Holdings was in talks with McKesson to buy all or part of the company. Analysts said McKesson’s stock has climbed steadily over the past year on rumors that drug makers such as Glaxo, Pfizer and Eli Lilly & Co. were eyeing the distributor.
Spokesmen for Glaxo and McKesson declined to comment specifically on reports of discussions between their firms.
McKesson’s prime attraction is not its massive drug wholesaling business, which accounted for about 95% of its $12.2 billion in sales last year. Instead the allure comes from a tiny division, PCS Health Systems Inc., a pharmacy benefit management firm with estimated revenue of $175 million, or less than 2% of McKesson’s total sales.
Why all the interest in PCS? Fearful of losing influence over the price and distribution of their products, drug makers are rushing to acquire pharmacy benefit companies, which now exercise control over more than half the nation’s $65-billion-a-year drug business. Pharmacy benefit firms work with employers and health maintenance organizations to hold down drug prices, usually by encouraging the use of lower-cost generic drugs or by demanding--and getting--discounts on name brands.
Last week, drug giant SmithKline Beecham offered $2.3 billion for Diversified Pharmaceutical Services, a pharmacy benefit company owned by United Healthcare Corp. That followed last November’s acquisition by Merck & Co., the world’s biggest drug maker, of Medco Containment Services for $6.6 billion.
With Diversified Pharmaceutical out of the running, McKesson’s PCS unit is “the most attractive, the largest, the most profitable and has the best investment in technology” of the drug benefit management firms, said John Ford, an analyst at Bear, Stearns & Co. in New York.
Added Lawrence C. Marsh, an analyst with Wheat First Butcher & Singer in Richmond, Va.: “PCS is a real jewel that’s not attached to (a drug maker) yet.
Marsh estimated that PCS’ revenue and operating earnings grew at a hefty 60% clip last year and that growth should nearly equal that pace this year. Importantly, PCS accounts for about 16% of the parent firm’s total operating earnings, he said.
He projects that PCS would be worth up to $3.3 billion, an estimate based on the price SmithKline is paying for Diversified Pharmaceutical. While DPS manages pharmacy benefits for 14 million people, PCS covers about 45 million.
Analysts noted that PCS is of considerable strategic importance to McKesson.
Citing company policy, Marvin L. Krasnansky, McKesson’s vice president of corporate relations, refused to discuss reports of discussions with Glaxo. However, he noted that PCS “is a critical part of our business strategy and we consider it a core business.”
Even if McKesson management isn’t interested in selling, analysts said the company will have to entertain offers to meet its obligation to shareholders.
“If you’re a public company and someone throws a tremendous amount of money at you, you can’t necessarily turn it down,” said Ford, the Bear Stearns analyst. “But I believe the company does not want to sell.”
Meanwhile, a spokesman for Glaxo’s U.S. unit in Research Triangle Park, N.C., said the company’s policy is to not comment on “rumors and speculation.”
“The whole area of managed care is one we’re deeply involved in and one in which we are talking to a variety of individuals and organizations that may help us better meet our company’s needs,” spokesman Rick Sluder said.
