Cardinal, CVS JV creates more upheaval in U.S. drug supply chain

The global drug wholesaling industry is in the midst of a wheeling-and-dealing binge as wholesalers and pharmacy chains look to secure supplies at the best prices. AmerisourceBergen ($ABC) hooked up with Walgreen ($WAG) and Alliance Boots in Europe and McKesson ($MCK) has struck a $5.4 billion deal to buy German wholesaler Celesio. Now the third major player in the field, Cardinal Health has hooked up with the country's largest pharmacy provider CVS Caremark ($CVS) with the aim of getting generic drugs at the best prices.

Cardinal and CVS Caremark said they will create a 50/50 partnership to source generic drugs, which they claim will make them the largest generic drug dealers in the U.S. The two already do business but intend to kick off their new arrangement July 1. The announcement is shy on details about how exactly they will buy drugs more cheaply, saying only that they "will collaborate with generic manufacturers to develop innovative supply chain and purchasing strategies."

But from the point of view of RBC Capital Markets analyst Frank Morgan, the new entity is not really good news for generic drugmakers, who produce 80% of the medicines now dispensed in the U.S. and work on very thin margins. He told Reuters the Cardinal/CVS joint venture means a very large customer might be looking for deep discounts. "To the extent that there was any concern about pricing leverage for the generic manufacturers, this JV will likely be one of the largest global buyers of generics on the planet now, so that should certainly calm any potential concerns about that," Morgan said.

Ross Muken, an analyst with International Strategy & Investment Group, told investors in a note that he believes the deal will save the companies between $450 million and $600 million a year, Bloomberg reported. "We view today's announcement as an unmitigated positive as the joint venture lowers Cardinal's generic acquisition costs," he said.

The arrangement calls for Cardinal to make $25 million quarterly payments to CVS over the 10-year term of the deal to make its contribution equal to that of CVS. It said the after-tax cost of those payments will be $435 million in current dollars. Other than that, there are no combining of assets or mixing of management.

The trend was kicked off last year when Walgreen made an international play, buying a 45% chunk of the Swiss drugstore chain Alliance Boots for $6.7 billion. This year, those two kicked off a 10-year deal with AmerisourceBergen to have the drug distributor handle branded drugs for the two chains this year and pick up generics next year. The tie-up gave AmerisourceBergen an international foothold. It was also a blow to Cardinal because Walgreen had been one of its major clients accounting for about 20% of its business. A few months after that deal was announced, McKesson announced its bid for Celesio as a way to get into Europe and strengthen its position with drugmakers there.

"The topic du jour is finding friends along the drug supply chain and looking for ways to add value," Jennifer Lynch, an analyst with BMO Capital Markets, told Bloomberg. "You're taking two parts of the supply chain and putting them together and we're hopeful it also allows them in some way, shape or form to get creative on the delivery side as well in terms of finding efficiencies."

- here's the announcement
- more from Bloomberg
- read the Reuters story

Related Articles:
AmerisourceBergen gets Walgreen, Boots biz
McKesson buying Celesio for $5.4B as wholesalers seek pricing leverage
McKesson may follow AmerisourceBergen into EU
AmerisourceBergen seeing shifts in drug distribution business

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