McKesson to buy US Oncology, boost specialty share

NEW YORK Mon Nov 1, 2010 3:08pm EDT

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NEW YORK (Reuters) - Pharmaceutical distributor McKesson Corp (MCK.N) plans to buy privately held US Oncology Inc ONCOLO.UL in a deal to expand its services in the fast-growing area of cancer care.

McKesson valued the deal at $2.16 billion, but said this included assumption of outstanding debt of about $1.6 billion. US Oncology was bought in 2004 by private equity firm Welsh, Carson, Anderson and Stowe for $1.7 billion.

McKesson, one of the three largest U.S. drug wholesalers, said on Monday the transaction, expected to close by year end, will modestly boost its earnings beginning in its 2012 fiscal year. Its shares rose 1.8 percent.

The deal would give McKesson a 25 percent share of the specialty distribution market and a significant exposure to the lucrative, high-margin oncology space, analysts said.

"The recent focus on expanding specialty pharma platforms (oncology specifically) is not surprising given the superior growth and margin profiles of the segment, especially relative to that of traditional branded drug distribution," Jefferies and Co analyst Richard Close said in a research note.

According to the National Institute of Health, total cancer costs amount to about $264 billion annually, with about $103 billion of that being direct medical costs, Close added.

Pharmaceutical service companies are moving to increase their capabilities in specialty medicines that treat cancer and other areas, whose sales are growing rapidly. These medicines are often expensive and tend to be injected or infused or otherwise require special handling or care.

Woodlands, Texas-based US Oncology is affiliated with more than 1,300 oncologists and provides services such as back office support and research. The company has annual revenue of $3.5 billion, according to the Welsh Carson website.

McKesson broke into the cancer market in 2007, when it bought Oncology Therapeutics Network, a U.S. distributor of specialty pharmaceuticals, for about $575 million.

With US Oncology, McKesson will still trail AmerisourceBergen Corp (ABC.N) in the oncology distribution area, according to Lazard Capital Markets analyst Tom Gallucci.

Earlier this year, another distributor, Cardinal Health Inc (CAH.N) acquired privately held Healthcare Solutions Holding for $517 million in cash to expand its specialty medicines business. [ID:nN09123402]

On a conference call with analysts, McKesson said it would fund the deal through a combination of cash and short-term financing.

McKesson plans to refinance substantially all of US Oncology's debt and expects to replace it with permanent financing.

McKesson "generates substantial free cash flow and could reduce debt quickly if it desired, but we do not expect management to cut back on share repurchases or race to pay down debt," said Carol Levenson of Gimme Credit, an independent research service on corporate bonds.

The price also includes the acquisition of an estimated $150 million to $160 million in cash tax benefits.

McKesson shares rose $1.21 to $67.19 in afternoon trading on the New York Stock Exchange.

(Reporting by Lewis Krauskopf and Esha Dey; editing by Dave Zimmerman)

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