Feature Article

No Brag, Just Fact

With the acquisition of McKesson's medical-surgical business, Owens & Minor has quietly grown its hospital supply business into a $6 billion business.

By Peter Galuszka

For a Fortune 500 company, Owens & Minor has been unusually low key and self-effacing. Long-time leader G. Gilmer Minor III, former CEO and now chairman, shuns the limelight. Favoring performance over hype, he has built the medical and surgical supply business by offering superior service and supply chain management expertise.

Owens & Minor has grown quietly into a $5 billion company with 43 warehouses dispersing supplies such as syringes, catheters and surgical caps, gowns and gloves throughout the country. The market for acute care surgical supply distribution has reached $14 billion, and it will continue growing as the United States population ages.

The hospital supply business is tough. Owens & Minor has competed alongside Cardinal Health, McKesson Medical-Surgical and some 12 regional players. But the company, under the leadership of CEO Craig R. Smith since 2005, is taking a big step that will strengthen its leadership in the acute care segment, and will expand the role of the Greater Richmond region as an important logistics center. This quarter, the company is expected to close a deal to buy McKesson’s medical-surgical business for about $170 million.

The transaction will boost annual Owens & Minor sales by $800 million to nearly $6 billion, beating out medical supply giant Cardinal Health in market share. “It’s a very big deal for Owens & Minor, "says Charlie Colpo, senior vice president for operations for the company. "It gives us access to a loyal customer base and access to a good sales force."

Wall Street analysts are cheering the move. “We view the deal as a win-win scenario. McKesson is shedding a business where it lacked the scale to be competitive, while Owens & Minor is adding scale to an existing efficient infrastructure in a synergistic fashion,” said Bank of America’s health care industry analyst, Robert M. Willoughby.

As key as the acquisition is to Owens & Minor’s future, it is only one initiative among several. The company also forayed recently into direct-to-consumer supply by buying Florida-based Access Diabetic Supply, number three in the market. That firm mails diabetic test strips and meters directly to diabetes patients. Because diabetes is one of the fastest-growing diseases in the U.S., the market is expected to reach $6 billion by 2009. Since the Access purchase last year, the number of direct-mail patients has grown from 60,000 to 136,000.

Looking ahead, Owens & Minor hopes to take its medical-surgical supply unit to new levels with OM Solutions, a consulting, outsourcing and technology service that embeds O&M employees in hospitals to streamline supply chains and improve processes. “Working with our OM Solutions’ team allows hospitals to focus on what they do best – treat patients – while our team takes on the task of improving and sometimes even outsourcing the day-to-day management of the supply chain for these hospitals,” said Colpo.

O&M runs these endeavors out of a new headquarters near the intersection of Interstates 95 and 295 in Hanover County north of Richmond. "Owens & Minor makes a great fit with Hanover," says Gene Winter, senior vice president of the Greater Richmond Partnership, the economic development organization for the region. "Not only is it Hanover's first Fortune 500 company, it augments the local industry mix. With its superb interstate access, Hanover is targeting logistics-related business. They got a world-class player when they landed Owens & Minor."

The company, which was founded in Richmond in 1882, moved into the new facilities this March after outgrowing previous quarters on Cox Road in the Innsbrook area of Henrico County. Rather than split its H.Q. staff among two buildings as before, the company relocated about 450 of them under one roof. The move has proven to be a boon to productivity and teamwork.

With the new building comes what could be a major new asset for logistics in the Great Richmond area. One wing of the new building houses what’s affectionately called “OMU" for Owens & Minor University, a cluster of classrooms, replete with state-of-the-art computer and training equipment to teach courses related to business, logistics leadership and ethics. According to Colpo, students have taken some 16,000 classes since inception, online and in the classroom, lasting from half a day to a week or more.

The courses cover operations, sales, leadership and technology. Students aren’t limited to Owens & Minor’s 3,700 employees, who drop in from points throughout the country. O&M also offers courses to hospital materials managers in a variety of supply chain management areas. With better training, hospital supply chain professionals also learn how to improve supply-chain performance.

O&M will take on 12 new warehouses and the business from 12 more. McKesson will continue to run old facilities under contract until the contract until the merger is consummated. Certain McKesson workers, including some 100 sales representatives, will become O&M employees. O&M will use its "university" extensively to help them learn the Owens & Minor way of doing things.

Describing the deal as "more of a carve-out than a traditional acquisition,” Colpo says he expects the deal to proceed smoothly.

The merger does not, however, presage a major push by Owens & Minor into new markets. “McKesson fits nationally because it enables us to leverage our existing distribution network,” says Colpo. The more the company can fill its warehouses, the more profitable it will be.

McKesson, an $80 billion company and one of three giants that control about 80 percent of the U.S. market for health care products, primarily pharmaceuticals, decided earlier this year to exit the acute care distribution sector.

Analysts see the merger as helping both parent firms. “McKesson’s long-awaited divestiture of Acute Care med-surg distribution is a positive for McKesson, OMI (Owens & Minor) and customers,” wrote Baird U.S. Equity Research in a recent report. “OMI gains expanded scale and volume leverage, cross-selling, market penetration, and working capital opportunities, while removing a less successful competitor at attractive valuation.”

As O&M absorbs McKesson Medical-Surgical, the company is determined to keep its lean operating style. The firm was an early player in applying computers to manage inventories and distribution. Chairman Minor's fascination with computers dates back to 1954 when he was a teenager. He and CEO Craig R. Smith have tapped that interest to their benefit. The trade journal InformationWeek not long ago rated Owens & Minor the most innovative user of technology among 500 companies in a national survey.

The company built its reputation as an IT leader by staying open to outside influences. Starting with experts from other local companies, including now-defunct retailer Best Products, Owens & Minor developed a data sharing and warehousing operation that uses a Web-based system to track hospital purchasing and contract data. Owens & Minor also has built technology capabilities through acquisitions, including a small company that developed innovative software for tracking bone and tissue implants and a company that created a web-based program that allows clinicians to easily manage expensive inventory in the clinical setting.

O&M took a major step in 1998 when it brought in Plano, Tex.-based Perot Systems to maintain its information technology, Colpo says. Just as O&M embeds its employees in customer facilities, Perot keeps its employees on site at O&M where they are readily available to oversee systems and troubleshoot problems. The outsourcing arrangement suits O&M just fine. Says Colpo: “We had trouble keeping pace with the explosive growth information technology."

Another way Owens & Minor keeps logistics in balance is by delving into private label brands. Just as local grocery chains link up with national soup makers to package private brands, O&M has issued medical supplies under its own corporate logo named MediChoice. The private labels extend to products such as surgical gloves and isolation gowns -- even baby powder and infant hats used in delivery rooms. By offering customers its own brands, Owens & Minor can rationalize commodity products and cut costs. For instance, instead of offering various types of baby powder, it may offer only two – one from Johnson & Johnson and one from its own MediChoice brand.

Despite its expertise in logistics, Owens & Minor is only beginning to reach out to other supply-chain companies and educators in the Greater Richmond region. It has run some programs in collaboration with the University of Richmond, and sees potential to collaborate with Virginia Commonwealth University -- a natural relationship given the fact that it serves VCU’s research and teaching hospital in Richmond.

Owens & Minor may be a quiet and unassuming company, but it is likely to play a bigger local role as Greater Richmond grows a larger logistical community. O&M already has the national clout and reputation to do so.

-- September 28, 2006

CEO Craig R. Smith

For more information...

Owens & Minor website

News

Owens & Minor Announces Federal Trade Commission Approval of Proposed Acquisition

08.16.06

Owens & Minor Signs 5-Year Agreement with Novation to Provide Medical and Surgical Product Distribution for Member Hospitals

06.12.06

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