--Express Scripts picks AmerisourceBergen as drug distributor
--Cardinal Health previously had contract with Express Scripts
--AmerisourceBergen already served Express' Medco business
--Contract seen offering high volume of sales but low profits
(Adds analyst comments, beginning in the sixth paragraph.)
By Jon Kamp
Express Scripts Holding Co. (ESRX) has picked AmerisourceBergen Corp. (ABC) over Cardinal Health Inc. (CAH) to distribute about $18.5 billion in medication each year for a pharmacy-benefit business recently boosted by a major acquisition.
Cardinal has been the drug supplier for Express Scripts, while AmerisourceBergen has served Medco Health Solutions, which Express Scripts recently acquired. Express Scripts sought a new three-year accord to cover the entire newly combined business starting Oct. 1.
The deal is high volume but offers modest profit margins, as evidenced by AmerisourceBergen's estimate the agreement will contribute approximately 23% of its revenue but only about 3% of its per-share earnings.
AmerisourceBergen, based in Valley Forge, Pa., factored in the possibility of winning or losing the business when it released a preliminary fiscal-2013 earnings-growth forecast last week. AmerisourceBergen said Tuesday that winning the deal has no effect on expectations for the current fiscal year, which runs through September, or its view for the upcoming year.
Although analysts viewed AmerisourceBergen as a front-runner for the contract, the news still sent shares higher, up 3.8% to $39.99 in recent trading. Cardinal also gained despite losing the contract contest, rising 0.5% to $43.53.
The contract disclosure "removes an overhang for the entire distribution sector," J.P. Morgan analyst Lisa Gill said.
The deal is positive for Express Scripts, she said, because combining the legacy distribution business with Medco's business gives AmerisourceBergen more volume in return for tighter margins. This furthers Express Scripts's goal of wringing $1 billion in savings from the Medco deal, she said.
Cardinal said in a filing with the Securities and Exchange Commission that the Express Scripts pact had provided about $9 billion in annual bulk-sales revenue to the company. But the earnings contribution is modest in comparison--ISI Group analyst Ross Muken estimated losing the contract would dent per-share earnings in the fiscal year ending June 2013 by just three or four cents. Analysts, on average, are projecting fiscal-2013 earnings of $3.56 a share.
Mr. Muken also estimated winning the deal will add about 10 cents to AmerisourceBergen's per-share earnings in the fiscal year ending September 2013. Analysts, on average, are expecting overall earnings of $3.14 a share that year.
Pharmacy-benefit managers, or PBMs, provide drug benefits for health-plan sponsors while using their purchasing clout to secure rebates from drug manufacturers. The big PBMs such as Express Scripts also run mail-order pharmacies that compete with retail outlets. The distribution agreement with AmerisourceBergen involves wholesale supplies for Express Scripts' mail-order and specialty-pharmacy businesses.
Analysts believed AmerisourceBergen had the best shot at winning the combined contract because the legacy Medco business it already served was bigger than the Express Scripts wholesale business at Cardinal. McKesson Corp. (MCK), the biggest drug wholesaler by revenue, wasn't viewed as a major competitor for the business. Its shares recently traded up 0.8% to $91.37.
Big wholesale contracts draw lots of attention when they come up for renewal. In April, McKesson scored a win by garnering a new $4 billion-per-year deal to supply medication to U.S. Department of Veterans Affairs facilities. McKesson has served that business for several years, but AmerisourceBergen and Cardinal made a push to take it away.
Looking ahead for Cardinal, Mr. Muken noted that contract renewals at CVS Caremark Corp. (CVS) and Walgreen Co. (WAG) over the next year present "a similar psychological headwind despite a modest amount of [earnings per share] actually remaining at risk." Those two drugstore chains are Cardinal's biggest customers.
--Tess Stynes contributed to this article.
Write to Jon Kamp at jon.kamp@dowjones.com.
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