Enlarges Cancer Drug Distribution Business

Early in November, the media heralded the acquisition of US Oncology by McKesson Corporation (NYSE: MCK) as a sign that the economy was rebounding. After all, they reasoned, committing to pay $2.16 billion in the current environment of uncertainty and constrained credit was an achievement in itself. But try as you might, you will find in none of these stories any information that anchors this deal to the historical or financial aspects of the health care M&A market. Instead, it was served up as a novel counterexample to the seemingly unending stream of negative stories and gloomy attitudes that have pervaded business reporting in recent quarters. Here we hope to remedy those deficiencies and illuminate both the deal and the M&A market by providing the financial information to interpret this deal.
Let us consider the basic components of this deal.  First, the buyer. Based in San Francisco, McKesson began operations as a drug distributor, but grew by branching out into complementary business lines. It currently provides medicines, pharmaceutical supplies, as well as information and care management products and services for the health care industry through two units. Its distribution solutions unit distributes prescription and proprietary drugs, medical-surgical supplies and equipment, as well as health and beauty care products. If that weren’t enough, its technology solutions unit offers enterprise-wide clinical, patient care, financial, supply chain and strategic management software solutions. The two units are complementary: each provides the other with critical information to conduct and grow its business. On a trailing 12-month basis, McKesson generated revenue of $110.0 billion, EBITDA of $2.4 billion and net income of $1.2 billion. In 2007, McKesson made a significant commitment to cancer drug distribution when it paid $562.0 million, or 0.2x revenue, to buy Oncology Therapeutics Network (OTN) from One Equity Partners. (One Equity  Partners originally acquired OTN from Bristol-Myers Squibb (NYSE: BMY) in 2004 for $210.0 million, or 0.1x revenue.) With OTN as its springboard, MCK clearly intended to expand its oncology drug business to capture the potentially rich upside in this trade. 
US Oncology, based in Woodlands, Texas, operates and supports a nationwide cancer treatment and research network. However, it began life as a physician practice management firm in the heyday of that industry, eventually becoming publicly traded. In a major turning point, it was acquired and privatized in 2004 by the firm of Welsh, Carson, Anderson & Stowe (WCAS) for $1.7 billion. At that time, USON generated revenue of $1.97 billion, EBITDA of $209.0 billion and net income of $71.0 million, so the price to revenue multiple was 0.9x; the price to EBITDA multiple, 8.2x. Having been pummeled by the collapse of the PPM industry and the recession of the early 2000s, shareholders were all too happy to cash out.
Fast forward six years, and WCAS is now selling US Oncology to McKesson for $2.16 billion, an amount that can easily be paid out of MCK’s cash flow. In the process, WCAS appears to have made itself at least $500.0 million over the six years of this investment. But it is not selling the same business as it bought. To avoid the stigma and drawbacks of the PPM industry, USON has been reinventing itself with the help of WCAS. It backgrounded practice management, brought cancer drug distribution front and center and emphasized the retail aspects of its business. In effect, by converging on the oncology business near and dear to MCK’s heart, it was transforming itself into an attractive acquisition target.
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