Cardinal, McKesson, Renew CVS Caremark Distribution Pacts

Date : 07/06/2009 @ 12:13PM
Source : Dow Jones News
Stock : AmerisourceBergen Corp. (ABC)
Quote : 97.51  0.39 (0.40%) @ 10:52AM
Amerisourcebergen share price Chart

Cardinal, McKesson, Renew CVS Caremark Distribution Pacts

Cardinal Health (NYSE:CAH)
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Cardinal Health Inc. (CAH) and McKesson Corp. (MCK) have both renewed contracts to distribute drugs to their largest customer - CVS Caremark Corp. (CVS) - in deals that keep the accounts largely intact yet are believed to be less favorable economically to the two wholesalers than the pacts they are replacing.

The contracts represented about 22%, or $20 billion, of Cardinal's fiscal 2008 revenue and 14%, or $15 billion, of McKesson's fiscal 2009 revenue, according to analysts, who viewed the announcements Monday in a positive light.

"The CVS renewals should lift one of the clouds that was hanging over the industry, given the potential impact of $35 billion-plus in industry volume up for renewal," Robert W. Baird analyst Eric Coldwell said, noting that CVS Caremark didn't switch suppliers, renewed for a longer term than expected and didn't entirely wipe out pricing.

The contract renewals mean Cardinal and McKesson by and large each keep the business they had before drug store chain CVS Corp. acquired giant pharmacy benefits manager Caremark Rx Inc. in 2007. They appear to do so, however, with tighter margins that reflect CVS Caremark's massive post-merger buying power.

Cardinal, while not disclosing details of the contract, effectively said as much. In announcing the renewed agreement to supply drugs to CVS retail pharmacies through mid-2013, Cardinal Vice Chairman George Barrett said in a release that the footprint of the agreement is fundamentally the same as the existing relationship, and that Cardinal Health already incorporated the economic terms in the fiscal 2010 guidance it gave during its June 2 investor day.

During that investor day, Cardinal cited its CVS Caremark contract as one of several headwinds expected to hit profits in its core business this fiscal year, with earnings for the "new" Cardinal Health, after a spinoff, down some 15% from FY'09 on a pro-forma, non-GAAP basis. Cardinal executives forecasted a group of market factors, including "some margin erosion" tied to customer contract renewals, to cause about 35% to 40% net of that total decline.

McKesson, which has supplied the Caremark pharmacy benefits management business, offered no details beyond announcing that it renewed its current distribution agreement to provide CVS Caremark with branded and generic drugs. A McKesson representative said the company doesn't comment on the economic terms of customer contracts.

"The renewal was largely within our range of expectations," said Ana Schrank, McKesson vice president, investor relations.

JPMorgan Chase & Co. (JPM) analyst Lisa Gill said she viewed the renewals positively, and noted they had become an overhang on the stocks amid speculation that CVS might consolidate the two contracts into one, potentially harming one of the wholesalers.

The Cardinal pact is a year longer than the typical three-year renewals, said Gill, noting the mid-2013 expiration.

"While McKesson did not specifically comment on the length or terms of the contract, we expect the length to be similar to (Cardinal's), and the terms to be in line with the company's expectations," and factored into the FY'10 guidance provided in May, she wrote. In early May, McKesson projected FY'10 earnings that fell short of Wall Street views, and said, among other trends, it had "experienced pressure on sell-side margins in our U.S. pharmaceutical business," a reference to customers who buy drugs from the company.

Neither Cardinal's nor McKesson's release mentioned Long's Drugs, with CVS acquired last year. Distributor AmerisourceBergen Corp. (ABC) currently has that $2 billion contract, with Gill predicted CVS will move to Cardinal or McKesson in mid-2010.

Cardinal, McKesson, AmerisourceBergen and CVS Caremark also traded slightly lower late Monday morning.

-By Dinah Wisenberg Brin, Dow Jones Newswires


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