Alco Health Services Corporation

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Alco Health Services Corporation

Post Office Box 959
Valley Forge, Pennsylvania 19482
U.S.A.
(215) 296-4480
Fax: (215) 647-0141

Wholly Owned Subsidiary of AHSC Holdings Corporation
Incorporated: 1985
Employees: 2,381
Sales: $2.30 billion

Alco Health Services Corporation is one of the largest wholesale pharmaceutical distributors in the United States. Made up of 12 major operating units, Alco serves more than 14,000 customers, including independent and chain drugstores, hospitals, mass merchandisers, nursing homes, clinics, and physicians, throughout the East, South, and Midwest. Alco Health generates about 80% of its revenue from pharmaceutical products, but it also provides a growing line of health and beauty products and a number of support services to its retailing customers.

Alco Health was incorporated in August 1985 with an initial public stock offering of 4.7 million shares. The company’s origins date back to 1977, when a diversified conglomerate, the Alco Standard Corporation, entered the pharmaceutical-distribution business by purchasing The Drug House, a major wholesaler operating in Pennsylvania and Delaware.

Alco Standard was the brainchild of entrepreneur Tinkham Veale II, who had built a multimillion-dollar conglomerate on the principle of corporate partnership. Veale sought to acquire healthy, owner-managed companies in the $5 million to $10 million range. He allowed each company practically full autonomy, while providing support in legal and tax matters. When Alco Standard was incorporated in 1960, it was a modest $5 million chemical company. By 1968 sales were $140 million, coming from 52 subsidiaries with products ranging from stamped metal parts to wax paper.

Shortly after Alco Standard’s acquisition of The Drug House, the company began to build a network of drug wholesalers. In early 1978 Duff Brothers of Chattanooga, Tennessee, was acquired, and later that year Marsin Medical Supply Company of Philadelphia, Pennsylvania, was purchased. Geer Drug, with annual sales of about $45 million, was acquired in 1979. Headquartered in Charleston, South Carolina, Geer foreshadowed an expansive drive southward. By the early 1980s, Alco Standard’s pharmaceutical distribution network was the third largest in the nation.

Alco Standard soon made other acquisitions of pharmaceutical wholesalers, including Kauffman-Lattimer of Columbus, Ohio; Smith-Higgins of Johnson City, Tennessee; Strother Drug of Virginia; and Brown Drug, which operated in South Dakota, Iowa, and Minnesota. At the same time, the drug industry itself was undergoing intense change. Health-care expenditures in the United States were on the uptrend, amounting to about 10% of the gross national product by 1985. As the population grew older, the health-care industry promised continued growth.

In 1985 Alco Standard’s drug-distribution operations were spun off into a separate company, Alco Health Services Corporation. Alco Standard retained approximately 60% of the new company’s stock. The new company continued to use Alco Standard’s administrative functions on a fee basis. Alco Health was led by John H. Kennedy as chairman and Joseph B. Churchman as president.

Shortly after Alco Health began to operate independently, it acquired the Valdosta Drug Company of Valdosta, Georgia, with $22 million in annual sales, and the $100-million-a-year Meyers and Company of Tiffin, Ohio. These two acquisitions helped push Alco’s sales over the $1 billion mark.

In the early 1980s drug wholesalers found new ways to support the independent drug retailers who comprised nearly 60% of their business. Wholesalers offered more non-drug products, like hospital supplies and health and beauty aids. Alco Health sought to strengthen its independent customers by sharing its own primary strength—marketing. By offering services like in-store merchandising and group advertising, wholesalers could help their customers compete with the growing drugstore chains. Alco Health introduced its retail support program in 1982. Support like customized price stickers gave a boost to those independent druggists who participated. A year later, Alco introduced a complete line of medical equipment for home use, from wheelchairs to disposable syringes under the Total Home Health Care program, which provided independent retailers the marketing support they needed for such products, through direct-to-customer delivery and accounting assistance.

Computer services provided by the wholesaler included management-information reports, automated retail accounts-receivable systems, and shelf labels for automated inventory control. By 1985 Alco Health was marketing an in-pharmacy computer system based on an IBM personal computer that was capable of being used for total store automation.

At the same time, wholesalers including Alco Health began to develop the business of large drugstore chains and mass merchandisers. In 1981 25% of all wholesalers’ business was to drugstore chains, up from 15% in 1971. The opportunity arose because of the reluctance of manufacturers to maintain the costly sales force needed for direct selling to chains. The trend continued throughout the 1980s. By 1985 chain drugstores and mass merchandisers made up 18% of Alco Health’s annual revenues.

Sales to hospitals also increased in the early 1980s, as health-care facilities attempted to lower their costs by reducing their pharmaceutical inventories. Alco was able to provide rapid, often same-day, service to many facilities. By 1985, 24% of Alco Health’s sales were to hospitals.

During the latter half of the 1980s, Alco Health continued to grow at a tremendous rate. In 1986 further acquisitions included L.S. DuBois Son and Company of Paducah, Kentucky; Pennington Drug of Joplin, Missouri; Mississippi Drug of Jackson, Mississippi; and MD Pharmaceuticals of Dothan, Alabama, adding $300 million in annual revenues. Archer Drug of Little Rock, Arkansas, and Michiana Merchandising of Mishiwaka, Indiana, were also purchased.

In 1987 Alco Health reorganized several of its operating units. Smith-Higgins, Valdosta Drug, MD Pharmaceuticals, Mississippi Drug, and Duff Brothers were combined to make up the southeastern region of Alco Health. Geer Drug and Strother Drug were combined to eliminate overlap. Management of the new units remained in the hands of regional managers, and their territories were enlarged considerably.

Alco Health’s marketing strategy, which focused on three areas—independent druggists, hospitals, and chain drugstores and mass merchandisers—remained constant throughout the 1980s. A major boost to the third segment came in 1987, when Alco Health was selected as the primary wholesale supplier to 1,000 of the Revco chain’s 2,000 drugstores. In 1988 revenues passed $2 billion.

John F. McNamara, formerly chief operating officer, became president of Alco Health in 1987. McNamara came to the company in 1981 when Kauffman-Lattimer was acquired. Kennedy remained chairman until August 1988, when previously retired Ray Mundt returned temporarily to oversee changes in Alco Health’s ownership. Mundt previously had served as president of Alco Standard and on the Alco Health board of directors.

In early 1988 a management group attempted a leveraged buyout of Alco Health, offering $26 per share to take the company private. Shortly thereafter, in June, McKesson, formerly Foremost-McKesson, the largest drug wholesaler in the country with 28% of the national market, offered $30 per share, or $508 million, for Alco Health. The deal, however, fell through three months later when the Federal Trade Commission ruled against the acquisition on antitrust grounds. Alco Health was still 49% owned by its former parent, Alco Standard Corporation. Alco Health explored options with its investment banker, Drexel Burnham Lambert.

In November 1988 a group of investors, which included Citicorp Venture Capital Ltd. and a group of Alco management-level employees proposed a cash tender offer for Alco Health’s shares at $31 per share. A holding company, AHSC Holdings Corporation (Holdings), was set up to handle the acquisition. The proposal was accepted and when the tender offer expired at the end of December 1988, Holdings owned 92% of Alco Health’s stock. The merger allowed for the conversion of the remaining equity into debentures due in the year 2004. Alco Health continued its normal daily operations during the transition of ownership. John F. McNamara led the company as chairman, CEO, and president from 1989.

The 1990s will provide new challenges and opportunities to Alco Health Services, and pharmaceutical wholesalers in general. The drug market promises to continue its expansion, fueled by an aging population and its need for health care. The trend in pharmaceutical distribution has been toward fewer competitors handling a greater market share. From 1979 to 1990 the number of U.S. drug wholesalers decreased from 150 to 90, while the role of middlemen has increased. The top five companies, including Alco Health, handle about half of the business nationwide. As the field of suitable acquisitions thins out, and as the pharmaceutical-distribution field becomes a battle of the giants, Alco Health may have to place greater emphasis on internal expansion, but considering the company’s tradition of efficiency Alco Health appears to be up to the task.