AmeriSource Health Corporation

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AmeriSource Health Corporation

300 Chester Field Parkway
Malvern, Pennsylvania 19355
U.S.A.
Telephone: (610) 727-7000
Fax: (610) 727-3600
Web site: http://www.amerisource.com

Public Company
Incorporated: 1985 as Alco Health Services Corp.
Employees: 3,200
Sales: $9.8 billion
Stock Exchanges: New York
Ticker Symbol: AAS
NAIC: 422210 Drugs and Druggists’ and Sundries Wholesalers

AmeriSource Health Corporation, formerly known as Alco Health Services Corporation, is the fourth largest wholesale distributor of pharmaceuticals and related healthcare products and services in the United States, through its wholly-owned subsidiary AmeriSource Corporation. AmeriSource operates a national network of 20 distribution facilities that supplies brand-name prescription drugs, generic drugs, over the counter healthcare products, cosmetics and fragrances, and medical/surgical supplies. The company serves hospitals, independent and chain drugstores, pharmacy departments of supermarkets and mass merchandisers, nursing homes, clinics, and physicians. AmeriSource also provides a line of health and beauty products and a growing number of support services to its retailing customers.

Building a Network of Drug Wholesalers: 1977–85

In August 1985, the company that would become AmeriSource was incorporated as Alco Health Services and held an initial public stock offering of 4.7 million shares. The history of the predecessor Alco Health Services can be traced to 1977, when a diversified conglomerate, the Alco Standard Corporation, entered the pharmaceutical-distribution business by pur-chasing 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. Healthcare expenditures in the United States were on the uptrend, amounting to about ten percent of the gross national product by 1985. As the population grew older, the healthcare industry promised continued growth.

Alco Health Services Grows as an Independent Operation

In 1985, Alco Standard’s drug-distribution operations were spun off into a separate company, Alco Health Services Corporation. Alco Standard retained approximately 60 percent 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 that comprised nearly 60 percent 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 percent of all wholesalers’ business was to drugstore chains, up from 15 percent 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 percent 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 percent 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 Mishawaka, 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.

Management-Led Buyout Leads to AmeriSource: 1998

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 Corp., formerly Foremost-McKesson, the largest drug wholesaler in the country with 28 percent 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 Com-mission (FTC) ruled against the acquisition on antitrust grounds. Alco Health was still 49-percent 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, was set up to handle the acquisition. The proposal was accepted and when the tender offer expired at the end of December 1988, AHSC Holdings owned 92 percent 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.

Company Perspectives:

A nationwide warehouse network, national accounts and dozens of value-added programs strengthen our proven performance in serving customers through our strong local organization. We deliver superior local service to customers while maintaining a low cost operating structure, enabling us to achieve superior returns on committed capital.

New Challenges and Opportunities in the 1990s

The early 1990s provided new challenges and opportunities to Alco Health Services and pharmaceutical wholesalers in general. The drug market continued its expansion, fueled by an aging population and its need for health care. The trend in pharmaceutical distribution was 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 increased. The top five companies, including Alco Health, handled about half of the business nationwide. As the field of suitable acquisitions thinned out, and as the pharmaceutical-distribution field became a battle of the giants, Alco Health placed greater emphasis on internal expansion.

In July 1994, Alco Health, one of America’s top five pharmaceutical wholesalers, changed its name to AmeriSource Health Corporation. The company aimed to increase its business by driving unnecessary costs out of its distribution system and repositioning itself as a unified source of products and programs nationally. Many of the company’s divisions, which until then had maintained their original identity, became part of the AmeriSource family. The company, now located in Malvern, Pennsylvania, continued to acquire other companies throughout the latter half of the 1990s: in 1995, Liberty Drug Systems, the North Carolina-based provider of pharmacy software and hardware and Newbro Drug Co. of Idaho Falls; in 1996, Gulf Distribution Inc.; and in 1997, the equity interests of Walker Drug Company LLC. AmeriSource also aimed to tighten its relationship with its retail customers via a nationwide telemarketing program instituted in 1995. However, in 1996, several of those customers were less than satisfied. In a case later dismissed in District Court, several retail pharmacies claimed that AmeriSource had conspired to deprive them of discounts offered by HMOs, hospitals, and mail order pharmacies.

In 1997, AmeriSource made national news as it joined again with McKesson, this time as part of a proposed merger. The U.S. District Court blocked the move, as it did a similar move that year to merge Bergen Brunswig and Cardinal Health. Both mergers would have reshaped the distribution picture across the United States. All four companies argued that they sought consolidation in a move to make themselves more efficient and cut prices. However, the FTC claimed that the mergers were the companies’ “chosen means to remove their incentives to cut prices.” The drug wholesalers, according to the FTC, had so many distribution centers that they were forced to cut prices to keep products off their shelves.

AmeriSource responded to the Court’s decision by turning its attention to local objectives, signing on new customers, attempting to control costs, and investing in new marketing initiatives cumulatively known as “disease state management.” “At the end of the day,” according to R. David Yost, president and chief executive officer of the company, in a 1998 Drug Store News article, “we maintain that wholesaling is a local business…. In our vision for the future, we see the community pharmacy playing a key role…. We see the pharmacist of the future being totally involved in customers’ healthcare management and being paid for it.”

To this end, AmeriSource, introduced value-added programs in the late 1990s, such as MedAssess, a disease state management program to help pharmacists monitor clients’ regimens, and the Diabetes Shoppe, a program designed to train the pharmacist to train the diabetic. Other programs included: Family Pharmacy, American Health Packaging, Health Services Plus, and ECHO, the company’s proprietary software system. In 1999, the company purchased a substantial share of ADDS Telepharmacy Solutions, Inc., a leading provider of e-commerce medications management.

The company continued to grow in size and reputation in 1999 and 2000. In 1999, AmeriSource purchased C.D. Smith Healthcare, a leading regional wholesale pharmaceutical distributor, and gained a contract with the Department of Veterans Affairs to provide services to its more than 500 pharmacies. In 2000, it purchased Pharmacy Healthcare Solution, a pharmacy consulting company. The company became a “preferred provider” in 1999 of both the Pharmacy Providers Service Corporation, representing 1,200 independent pharmacies, and Premier, Inc., the nation’s largest alliance of hospitals and healthcare systems in the United States.

Principal Subsidiaries

AmeriSource Corporation; C.D. Smith Healthcare, Inc.

Principal Competitors

Bergen Brunswig Corporation; Cardinal Health, Inc.; McKesson Corporation.

Key Dates:

1977:: Alco Standard Corporation purchases The Drug House.
1978:: Duff Brothers and Marsin Medical Supply Company are acquired.
1979:: Geer Drug is acquired.
1985:: Alco Health Services Corporation is incorporated.
1986:: L.S. DuBois Son and Company, Pennington Drug, Mississippi Drug, MD Pharmaceuticals, Archer Drug, and Michiana Merchandising were purchased.
1987:: John F. McNamara becomes president of Alco Health.
1988:: AHSC Holdings Corporation acquires Alco in a management-led buyout.
1994:: Alco Health changes its name to AmeriSource Health Corporation.
1995:: AmeriSource purchases Liberty Drug Systems and Newbro.
1999:: The company purchases C.D. Smith Healthcare and a substantial share of ADDS Telepharmacy Solutions, Inc.