Cardinal, McKesson, Renew CVS Caremark Distribution Pacts
July 06 2009 - 11:13AM
Dow Jones News
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
215-656-8285; dinah.brin@dowjones.com