McKesson Corp. (MCK) agreed to buy privately held US Oncology Inc. for $2.16 billion, including the assumption of $1.6 billion in debt, as the drug wholesaler and health services company continues to expand in cancer services and distribution.

The move, which follows the 2007 acquisition of Oncology Therapeutics Network, is another milestone in McKesson's drive into the booming specialty distribution arena, which delivers complex treatments for cancer and other diseases.

The company will hold 25% of the $25 billion U.S. specialty pharmaceuticals distribution market, making it a solid second in that segment to drug distributor AmerisourceBergen Corp. (ABC), which has an estimated 55% share.

McKesson Chairman and Chief Executive John Hammergren said the pharmaceutical industry's pipeline of more than 800 new cancer drugs and new indications for existing treatments "is far greater than any other therapeutic category," and as a result, demand for oncology services is rapidly increasing.

US Oncology's services offerings include practice-management services to physicians and cancer centers. The combined company will serve nearly 3,000 U.S. oncologists, he said.

"This is a big win for McKesson," said pharmaceutical industry consultant Adam Fein, president of Pembroke Consulting Inc. McKesson has about 16% of the specialty distribution market, while US Oncology holds 9%.

The purchase is just the latest deal in what's been an active health-care M&A market since the overhaul bill was finalized in March. Since then, there have been an average of 104 deals per month for U.S. targets, according to Dealogic, compared to 86 a month in the previous 12 months.

However, while 2010 already has seen more health-care deals than a year ago, the total value of the deals remains 46% less than 2009, which included Pfizer Inc. (PFE) buying Wyeth and Merck & Co. (MRK) purchasing Schering-Plough.

The US Oncology deal, strategically, is viewed as a missed opportunity for drug distributor Cardinal Health Inc. (CAH), which "has been struggling to rebuild its position and play catchup" in specialty distribution, Fein said.

Last week, Cardinal took the unusual step of dismissing a rumor that it was planning a leveraged buyout after a blog noted a surge in its credit default swaps, which represent the cost of insuring a company's bonds. Fein noted that acquiring a company with a lot of debt, like US Oncology, also could cause credit default swaps to rise, and a Cardinal interest in acquiring the cancer-services distributor that might explain the unusual CDS activity last week.

A Cardinal Health spokesman wasn't immediately available for comment.

McKesson, the largest U.S. pharmaceuticals distributor by revenue, and US Oncology expect the deal to close by Dec. 31. Along with the assumed debt, the purchase price includes the acquisition of $150 million to $160 million in tax benefits, arising from certain net operating losses, that McKesson can use in the future. The companies expect substantially all of US Oncology's debt will either be repaid or refinanced.

The deal isn't expected to have an effect on McKesson's bottom line this fiscal year, which ends in March, but should boost profit modestly in the coming year, the company said.

The deal is positive for McKesson, as it gives the San Francisco company "a significant increase in market share in specialty distribution, the fastest growing segment for distributors," JP Morgan analyst Lisa Gill said. She said the valuation appears to be a discount to the Oncology Therapeutics Network deal.

Barclays Capital analyst Lawrence Marsh said the deal confirms growth opportunities in the oncology supply chain space over the next three to five years. Although the company seems to be building conservative figures into its prediction of modest earnings accretion in fiscal 2012, Marsh sees the potential for a boost of more than 40 cents in cash earnings per share, or more than 25 cents based on generally accepted accounting principles.

Bruce Broussard, US Oncology's chairman and CEO, will lead the combined McKesson Specialty Care Solutions business, which will have headquarters in The Woodlands, Texas, where US Oncology is based.

McKesson recently rose 1.7% to $67.10, while Cardinal Health gained 0.8% to $34.95 and AmerisourceBergen slipped 7 cents to $32.76.

Last week, McKesson said its fiscal second-quarter profit jumped 8.6% as the company's revenue increased, though the bottom line was skewed by items such as write-downs.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; dinah.brin@dowjones.com

(Nathan Becker and Thomas Gryta contributed to this report.)
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