D&K Wholesale Drug, Inc.

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D&K Wholesale Drug, Inc.

8000 Maryland Avenue
Suite 1190
St. Louis, Missouri 63105
U.S.A.
(314) 727-3485 Fax: (314) 727-5759

Public Company
Incorporated: 1987
Employees: 185
Sales: $319 million
Stock Exchanges: NASDAQ
SICs: 5122 Drugs, Proprietaries & Sundries; 6719 Holding
Companies Not Elsewhere Classified

D&K Wholesale Drug, Inc. is one of the rising stars in the regional wholesale drug distribution industry. With sales approaching $320 million in fiscal 1995, the company provides its services to customers in 17 states, primarily in the Midwest and south central United States. From warehouse facilities located in Cairo, Illinois, and Lexington, Kentucky, D&K Wholesale Drugs distributes a wide range of Pharmaceuticals, beauty aids, and health products to such diverse customers as large chain drugs stores, independent pharmacies, both small and large hospitals, and other specialists that provide health care services.

D&K Wholesale Drugs was founded as a holding company in 1987 by Hord Armstrong, III and his cousin, W. VanMeter Alford, Jr. After graduating from Williams College in 1963, and attending New York University’s business school the following year, Armstrong started his career in business with the Morgan Guaranty Trust Company, and in a short period of time was elected assistant treasurer. In 1977, he left Morgan Guaranty to serve as first vice-president at White Weld & Company, and when White Weld was acquired by Merrill Lynch in 1978, Armstrong left to become treasurer of Arch Mineral Corporation, a coal mining operation. By 1981 he had been appointed vice-president and chief financial officer of Arch Mineral.

In the late 1980s, Armstrong, Alford, and a group of investors decided to form D&K in order to acquire two pharmaceutical distributors: Delta Wholesale Drug, Inc. and W. Kelly Company. Delta, based in Cairo, Illinois, was a small but highly successful regional wholesale pharmaceutical distributor that sold primarily to large drug store chains. Kelly, a Kentucky based company founded in 1941, sold Pharmaceuticals to independent drugs stores in the central southern states. D&K Wholesale Drugs—so named for the “D” in Delta and the “K” in Kelly—was established as a private company in 1987. Armstrong became the company’s chairman, chief executive officer, and president. Alford, who had previously served as president and general counsel for Diamond Shamrock Company, an energy resources firm, assumed the positions of president, chief operating officer, secretary, and director.

Together, Delta and Kelly initially comprised the entire working operations of D&K Wholesale Drugs, but within a short period of time Armstrong and Alford had initiated a comprehensive plan to revise the direction of both companies. The new strategy included a plan to increase service capabilities, incorporate new product lines for distribution, and expand into nearby geographical areas.

During this time, the wholesale drug industry was beginning to flourish. In ten years, from 1980 to 1990, industry sales increased from just over $6 billion to nearly $31 billion. Demographic, medical, and social trends fueled this dramatic increase. In 1980, within the United States, there were 72.5 million people over the age of 45; by 1990, there were over 81 million people who had passed this age. This part of the population, according to studies analyzed by Armstrong and Alford, tended to have more disabilities and chronic illnesses than younger segments of the population. At the same time, government health insurances and private insurance companies initiated cost containment procedures that strongly advocated use of pharmaceutical treatments rather than in-hospital curative techniques such as surgeries. The owners of D&K were convinced that these trends would continue for some time into the future.

Furthermore, new drug therapies developed by large pharmaceutical manufacturers required a wider distribution network than ever before, due to the increase in the amount of drugs being purchased. As a result, these large companies began to rely more heavily on wholesale drug distributors in order to sell their products. From 1980 to 1990, the percentage of drugs sold through drug wholesalers jumped from 57.3 to 75 percent. In addition, the number of pharmaceutical wholesale companies dropped from 139 to 84, primarily because of large wholesalers acquiring smaller firms to create more efficient economies of scale. Those firms which sold pharmaceutical items, including regional drug stores chains, mail order companies, grocery stores with pharmacies, and small, independent pharmacies, were the focus of D&K’s marketing strategy. Armstrong and Alford thought that if they could provide a highly efficient and highly personal service approach to capitalize on the trends in health care treatment, then their new company was assured of success.

D&K’s management proved correct. From 1987 to 1989, the company’s net sales jumped to $79.3 million. The following year, the company increased its sales force, and immediate results were seen in sales, particularly in Cincinnati, Louisville, and the entire state of Iowa. With contracts through a mail order prescription company, as well as with a midwestern hospital chain, the company’s net sales figures continued to increase. By 1991, net sales had increased a hefty 25.6 percent to $129 million, and the following year, Armstrong took the company public.

In 1992, the company’s net sales increased by 12.6 percent to $145.2 million. This increase in sales was largely due to the success of D&K’s marketing team in the Louisville, Cincinnati, and Iowa locations. Net sales also increased due to contracts with a large hospital chain, a mid-sized drug store chain, and a number of large grocery chains which housed pharmacies on their premises. This new business more than offset the loss of sales amounting to over $14 million that had been garnered from a mail order prescription company the previous year.

With the added revenues, management decided that this was an appropriate time to upgrade and improve upon the company’s operational services. Consequently, D&K installed a state-of-the-art computerized inventory management system, while also installing and implementing new computer equipment and various software programs to improve efficiency. Management expanded the company’s delivery system by using company vehicles and establishing regional transfer centers that provided quicker deliveries over a wider geographical area. In addition, the company centralized its marketing, finance, and purchasing departments, and hired new staff to help with information systems, delivery of products, and sales.

By 1993, D&K had established two large distribution centers and five transportation depots to serve a 14 state area, including Indiana, Illinois, Iowa, Missouri, Kansas, Oklahoma, Arkansas, Mississippi, Alabama, Tennessee, Kentucky, Ohio, West Virginia, and Virginia. The company arranged a two-year contract with Medicap Pharmacies, Inc., in Des Moines, Iowa, to supply products to over 90 independently operated drug stores within the group. The sales from this agreement alone were expected to reach approximately $40 million by the end of the two-year period.

At the same time, D&K joined an association called the Independent Drug Wholesalers Group (IDWG), which was made up of 55 wholesalers doing business from coast to coast. The association was formed in order to pool resources and compete more effectively within a limited market. One of the most successful developments to come out of the association was its own proprietary brand of generic drug called ALIGEN. D&K arranged to market ALIGEN products and other generic pharmaceuticals developed by the Independent Drug Wholesalers Group so that it could capitalize on the increasing market share of these products.

During 1994, the company made significant steps in positioning itself to capture a larger share of the wholesale distribution market. In June, D&K acquired selected holdings of Malone & Hyde, Inc., a Memphis-based subsidiary of the Drug Distributors Unit of Fleming Companies, Inc. The purchase included all the pharmaceutical inventory and all the non-prescription inventory of Malone & Hyde Drugs, Inc. that was meant for the Super D Drug Store chain, a 118-store retail drug operation. Through this acquisition, the company also assumed the supply contract, estimated at approximately $50 million annually, between Super D Drug Store and Malone & Hyde. As a result, D&K became the primary provider of over-the-counter pharmaceuticals and prescription drugs to the entire Super D Drug Store chain. By the end of fiscal 1994, net sales had passed the $200 million mark and had risen to $211.2 million, an increase of nearly 26 percent over the previous year’s figures.

After its successful incorporation of the assets of Fleming’s Malone & Hyde Drug Distributors unit, management at D&K began to look for additional acquisition prospects. In October 1994, the company acquired the Northern Drug Company of Duluth, Minnesota. D&K purchased all of Northern’s common stock at the discount price of $5 million and began to assume control of Northern’s operations and distribution network almost immediately. Northern, with annual net sales of $60 million, was a full-service wholesale drug company with over 200 customers located throughout Minnesota, Michigan, and Wisconsin. Nearly 80 percent of Northern’s customers were independent drug stores, with the remaining 20 percent of sales coming from two large hospital accounts.

Continuing its very first acquisition plan, in March 1995 D&K acquired Krelitz Industries, Inc. Krelitz, a wholesale drug company based Minneapolis, with annual sales over $100 million, was purchased by D&K for $1.4 million in both cash and stock. Krelitz operated through Twin City Wholesale Drug Company, one of the leading regional distributors to hospitals, clinics, and various other retail stores. The company’s most important contract was with the Minnesota Multi-State Consortium, a managed care business that provided Krelitz with over $30 million in sales annually. As a bonus, along with its purchase of Krelitz, the acquisition also included a subsidiary called Viking Computer Services, Inc., which provided highly sophisticated computerized systems and software for companies within the pharmaceutical wholesale distribution industry, including inventory control, pharmacy disbursement, computerized order entry, and innovative payment processing systems.

Fiscal 1995 was a watershed year for D&K. Net sales increased an incredible 51.5 percent over the previous year to $320 million. In just seven years, net sales had jumped from $79.3 million to the 1995 figure. In addition, the company’s net income increased from a loss of $38,000 in 1991 to a gain of $1.4 million by 1995. Earning per share also increased from five cents in 1992 to 54 cents per share by the end of fiscal 1995. All of these factors gave encouragement to D&K management, and plans for further expansion were under way.

During the late 1980s and early 1990s, there was a movement within the industry to consolidate operations and develop more efficient economies of scale. This consolidation led to the emergence of six leading drug wholesale companies, each with net sales amounting to over $4 billion. These six companies held approximately 80 percent of the drug wholesale market in the mid-1990s. A second tier of about 40 drug wholesale companies, among which D&K counted itself, also emerged, each with less than $2 billion in net sales. In 1995, D&K management believed that it would be one of the second tier companies to participate in the consolidation of drug wholesalers at that level.