By Bill Berkrot
Dec 10 Pharmacy chain CVS Caremark Corp
and pharmaceutical distributor Cardinal Health Inc on
Tuesday announced a 10-year agreement to form the largest
generic drug sourcing operation in the United States, the
world's biggest generic drug market.
The 50-50 joint venture, which combines the generic drug
purchasing power of two of the largest companies in the market
for the cheaper medicines, will be operational as soon as July
1, 2014. Under the agreement, Cardinal will pay CVS $25 million
on a quarterly basis for the duration of the contract, with an
estimated after-tax value to CVS of $435 million.
"We view this agreement positively as it provides an
effective way to drive better purchasing through increased scale
without a large capital commitment or increased complexity of
international markets," JP Morgan analyst Lisa Gill said in a
The companies also announced a three-year extension of their
existing distribution agreements, taking them through June 2019.
The U.S. market for medicines has seen a major shift toward
cheaper generic drugs following a wave of patent expiries in
recent years for major brand-name treatments and a growing
effort to lower costs throughout the healthcare system. Generic
drugs now account for more than 80 percent of all prescriptions
filled, according to data from IMS Health, which tracks
prescription drug data.
RBC Capital Markets analyst Frank Morgan said the
CVS-Cardinal joint venture should help keep generic drugmakers
from substantially raising prices.
"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.
"From the CVS perspective, this joint venture brings
quantifiable incremental cash flows to CVS over the next 10
years and also the potential for savings down the road," Morgan
ISI Group analyst Ross Muken in a research note said the
deal was important following tie-ups by Cardinal's main
competitors - AmerisourceBergen Corp and McKesson Corp
. He was referring to the Amerisource deal with pharmacy
chain Walgreen Co and McKesson's bid to buy German
pharmaceutical wholesaler and retailer Celesio
"The partnership puts Cardinal Health back on equal footing
with other industry participants that have formed buying
groups," Muken said.
Muken forecast that the deal could add 25 cents to 30 cents
per share to annual Cardinal earnings and 18 cents to 20 cents
to CVS Caremark earnings per share.
CVS Caremark shares rose $1.38, or 2.1 percent, to $68.11,
while Cardinal shares were up $2.50, or 3.9 percent, at $66.77
in afternoon trading on the New York Stock Exchange.