Bindley Western Industries, Inc.

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Bindley Western Industries, Inc.

4212 W. 71st Street
Indianapolis, IN 46268
U.S.A.
(317) 298-9900
Fax: (317) 297-5372

Public Company
Incorporated: 1968
Employees: 450
Sales: $2.9 billion
Stock Exchanges: NASDAQ
SICs: 5122 Drugs, Proprietaries & Sundries

Twenty-five years after starting his operation in borrowed basement space, Bill Bindley has built Bindley Western Industries, Inc. into the fifth-largest distributor of Pharmaceuticals, health care products, and beauty aids in the United States. One of the owner’s most gratifying moments came in 1990 when Fortune magazine recognized the company as second best in the country in revenue-per-employee. That year Bindley Western took in a little more than $2 billion in sales and employed 429 people, resulting in $4.7 million per employee.

In 1865 Bindley’s great-grandfather founded E.H. Bindley & Company. Located in Terre Haute, Indiana, the company provided pharmaceuticals to independent corner drug stores. By 1941, the year Bill Bindley was born, Bindley Company was thriving as a small, well-respected drug wholesaler to local hospitals and apothecaries.

After graduating from Purdue University in 1961 with a degree in industrial management, Bindley decided against joining the family business and signed on as a management trainee with Brunswick Corporation. Not long afterward, he switched firms and began working in the finance department of Controls Company of America where he remained until 1965. The same year, at his father’s request, Bindley finally joined the management team of the family business.

Recognizing the beginning of a new era of chain drug stores and the myriad possibilities for expanding the family operation, Bindley approached his father for support for his ideas. However, the father was more conservative than the son and refused to allow him to use the family resources for any risky ventures that might threaten the stability of the company.

Bindley accepted his father’s decision, but after three years with the family firm, he began to tinker with ways to create his own company. Unable to convince his family to provide him with start-up capital and unable to borrow money from local banks, Bindley decided to raise the needed cash on his own. By mortgaging his house and selling some equity in a real estate development in Aspen, Colorado, Bindley was able to raise $50,000. He asked his father if he could use the basement of the family’s company building in Terre Haute and opened Bindley Western Industries with an employee, a truck, and a driver.

Even though both Bindley and his family were in the same business and potential competitors for the same market, there was no resentment between him and his father. In fact, the two men reached an amiable agreement: Bindley’s enterprise would exclusively target the burgeoning new market of wholesale drug distribution to chain stores, while the family business would continue the tradition of selling to the local, independent drug stores.

Bindley’s family was acquainted with Bud Hook, the president of Hook’s Drug Stores during that time, and a stroke of good luck allowed Bindley to study Hook’s purchasing methods as well as which items he chose to warehouse. Bindley devised a plan to purchase pharmaceuticals at a lower price, provide better service, and better turn-around time. He soon signed a contract with Hook, and Bindley Western Industries had its first major customer.

In 1973, Bindley Western had grown large enough to move from the basement in Terre Haute to corporate office space in Indianapolis. The founder had established a market niche for his company by implementing a simple strategy—take over the service load for pharmaceutical manufacturers and reduce the price of purchasing drugs by allowing chains to buy products from Bindley Western on a more cost-effective basis than if the manufacturer itself handled shipping, replenishing inventory, and warehousing. By 1975 the company had reached $100 million in sales.

One crucial factor in the company’s success was its ability to develop technology in order to help its customers manage inventory, reduce lead time, and make pharmaceutical purchases more efficiently. No drug manufacturer, even if it were willing and able to sell directly to drug stores and hospitals, could match the rates of Bindley Western and other distributors. In spite of the fact that profit margins were very thin, the company’s automated distribution system allowed it to become the lowest-cost provider in the industry. With a growing reputation as the most efficient wholesale distributor in the pharmaceutical industry, long-term relationships were established with companies such as Hooks, Eckerd, Rite-Aid, Revco and CVS. In 1977 Bindley Western entered the ranks of the top ten drug wholesalers in the United States.

When his father retired in 1979, the family decided to sell E.H. Bindley and Company. Since the business was no longer run by relatives, Bindley felt released from the constraints of competing with his own family. As a result, he began to develop his firm into a full-service pharmaceutical wholesaler. With approximately $15 million in capital expenditures, Bindley Western began distributing non-perishable foods and health and beauty aids in addition to selling wholesale drugs. The time had also come to expand the firm’s markets from chain drug stores to independents and other retailers.

In fifteen years Bindley Western grew from $50,000 in startup capital to sales of $440 million. In 1983 the company went public and revenues began to soar with internal growth. Other positive factors were an industry compounded growth rate of 15 percent since 1980, the increasing reliance of manufacturers on drug wholesalers, and the aging of America. Soon Bindley Western was the fifth-largest drug wholesaler in the country.

The transition from a private to a public company, and the demands of an accelerated growth rate, forced a turnover in upper management in the early 1980s. Many of the individuals who were with the firm from the beginning no longer fit into the management style suitable to a larger firm. Much more problematic, however, was the FBI investigation that started in 1985. Three employees of the company, two of whom were designated board members, were accused of “illegal drug diversion” and of accepting kickbacks from vendors in return for placing orders with those vendors.

The FBI determined that there were no other individuals involved in criminal behavior besides the three employees initially identified and declared the company itself free from blame. The charge of illegal drug diversion was proved wrong; the individuals had bought drugs from legal secondary suppliers. However, they were found guilty of accepting kickbacks and avoiding income tax. Fired by Bindley Western in the summer of 1985, two of them went to prison and the third committed suicide

Bindley Western stock dropped dramatically from $17 to $6 per share. Financial analysts wondered how the company, and Bindley himself, would deal with the scandal. As sales continued to grow—from $626 million in 1985 to $1 billion in 1987—Bindley Western’s stock began to recover slowly. Since no customers had been lost during the crisis, and the company’s ability to provide efficient service continued unabated, business resumed as usual. Yet the investment community remained wary. Finally Bindley realized that the company’s reluctance to reveal information during the drug diversion scandal had been a public relations fiasco. Bindley Western immediately implemented a credibility campaign that was aimed at rehabilitating the company’s image and reassuring the investment community.

With the acquisition of Stamford Drug Group in 1987, Bindley Western aggressively entered the direct store delivery market of the wholesale pharmaceutical industry. Direct store delivery includes sales to supermarkets, hospitals, independent drug stores, health maintenance organizations, and home health care sites. Comprising all the sales outside the chain warehouse market, the growth of direct store delivery sales also produced profit margins from three to six times higher than drug store sales did, leading to a consistent streak of higher annual earnings. As the company inaugurated a coast-to-coast distribution network the same year, Bindley Western was proud to announce that it had surpassed the $1 billion sales mark.

The wholesale drug industry experienced rapid consolidation from 1982 to 1992, and by the end of the ten-year period, seven firms, including Bindley Western, controlled 80 percent of the $40 billion market. By employing coast-to-coast distribution networks and centralized data processing, these firms have tried to build economies of scale in order to offset razor-thin profit margins.

Bindley Western exemplifies many trends in the pharmaceutical industry. In 1990, the company posted $2 billion in sales, but net earnings of $9.7 million. In 1992, the company reported sales of $2.9 billion, while net earnings increased to $12.8 million. High profit margins are not endemic to the wholesale drug industry, but with cutting-edge technology and distribution efficiency, Bindley Western created substantial earning potential.

Automation contributes to the company’s distribution efficiency. Computerization enables Bindley Western to keep the number of its employees low while providing the tools necessary to replace inventory without high warehousing costs. The days when a customer picks up the phone and calls to place an order are long gone. At Bindley Western, placing an order involves communication through the use of hand-held, portable, electronic ordering equipment. Larger customers communicate by means of a mainframe-to-mainframe computer network, and all payments are done by means of electronic fund transfers. And due to the efficiency of the company’s inventory system, it doesn’t have to stock large quantities of products. By maintaining a smaller inventory which turns over 30 times a year—in contrast to the industry average of eight—Bindley Western significantly reduces the costs related to warehousing in its fourteen sites across the United States.

Continually searching for new and more profitable markets, in 1992 Bindley Western focused on alternative care delivery. The market for alternative care involves shipping Pharmaceuticals, such as new biotechnology drugs, to places other than drug stores or hospitals. A new AIDS drug will be shipped directly to an individual’s home, while innovative cancer drugs will be shipped directly to the cancer clinic that makes the request. The acquisition in March of 1993 of a Florida-based pharmaceutical wholesaler that sells dialysis and cancer drugs over the phone, Charise Charles Ltd., fit into this market strategy.

Bindley Western, along with the entire drug industry, suffered when newly elected U.S. President Bill Clinton attacked pharmaceutical companies by accusing them of profiteering, a scheme that involves increasing drug prices much higher than the rate of inflation. Although most drug companies denied the charge, Clinton’s accusations raised the issue of a federal control on drug prices. Such legislation would have an adverse effect on Bindley Western because the majority of the company’s revenue comes from prescription drug sales.

The owner was nevertheless optimistic about the company’s future as Bindley Western Industries celebrated its twenty-fifth anniversary in 1993. Bindley predicted that health care reform would help his firm more than hurt it, especially if Clinton included prescription drug coverage as part of the minimal package of nationwide health insurance benefits. This would translate into larger sales for drug wholesalers, a scenario Bindley envisioned with hope.