August 1, 2012 / 4:35 PM / 6 years ago

TEXT-Fitch on Express Scripts contract, AmerisourceBergen, Cardinal Health

Aug 1 - The $18.5 billion Express Scripts Holding Co. (ESRX)
contract awarded to AmerisourceBergen Corp. (ABC) has a moderate credit
impact on the credit profiles of both ABC and Cardinal Health, Inc. 
(Cardinal). Fitch views the announcement as slightly positive for ABC, and it
could prove slightly negative for Cardinal. The ratings of each are unchanged
and are provided at the end of this release.

The three-year contract is effective Oct. 1, 2012 and involves the distribution
of primarily traditional branded pharmaceuticals to the newly combined
mail-order and specialty pharmacy businesses of legacy ESRX and Medco Health
Solutions (Medco). ABC currently services the legacy Medco business, which
accounts for about 15% of ABC's $81 billion in revenues. Cardinal currently
services the legacy ESRX business.

In addition to increased revenues and cash flows, Fitch believes ABC will
benefit from certain dynamics associated with warehouse delivery revenues, such
as more favorable working capital arrangements and the ability to further
leverage the fixed costs associated with drug distribution. Additionally, ABC's
and ESRX's respective positions in the specialty pharmaceutical market could
provide an opportunity for collaboration in the future.

Fitch expects that ABC's fiscal 2013 EBITDA margin will be pressured by
approximately 5 bps, due to the very low-margin nature of the additional
warehouse delivery services. Fitch estimates that distributors earn between 20
and 40 basis points of profit on warehouse delivery. It is likely that this new
contract is toward the lower end of that range. Nevertheless, absolute profits
and cash flows will be positively impacted in the intermediate-to-longer term by
the new business.

Growth associated with the new business is expected to be in-line with the
overall pharmaceutical market, as mail-order penetration has plateaued in recent
years. Fitch believes mail-order penetration will remain relatively flat over
the near-to-intermediate term, although total mail-order volumes should benefit
somewhat from the aging U.S. population's increased use of maintenance

Cardinal will lose about $9 billion in annual revenues as a result of the lost
ESRX contract. Latest-twelve-month revenues as of March 31, 2012 were $107.6
billion. However, the credit impact is less severe since these revenues are very
low-margin. Nevertheless, decreased EBITDA generation will contribute to
moderately worse credit metrics, which may weigh on ratings.

The loss of the ESRX contract will, however, reduce Cardinal's exposure to
large, lower-margin customers. As a result, Fitch forecasts EBITDA margin
support of approximately 10 bps over the course of CAH's fiscal 2013. Cardinal's
five largest customers accounted for 59% of total revenues in 2010, including
approximately 23% and 22% from Walgreen Co. and CVS Caremark Corp.,

Fitch currently rates ABC and Cardinal as follows:
--Long-Term IDR 'A-';
--Senior Unsecured Bank Facility 'A-';
--Senior Unsecured Notes 'A-';
--Short-Term IDR 'F2';
--Commercial Paper 'F2'.

The Rating Outlook is Stable.

--Long-Term IDR 'BBB+';
--Senior Unsecured Bank Facility 'BBB+';
--Senior Unsecured Notes 'BBB+';
--Short-Term IDR 'BBB+';
--Commercial Paper 'BBB+'.

The Rating Outlook is Positive.

Additional information is available on

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' ( Aug, 12, 2011);
--'Navigating the Drug Channel' series
--'The ABCs (and Ds) of Drug Pricing' (July 25, 2012);
--'Drug Distributors: A Deeper Dive' (March 13, 2012);
--'An Overview: Getting to the Other Side' (Feb. 10, 2012);
--'U.S. Healthcare Stats Quarterly: First-Quarter 2012' (June 29, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
Navigating the Drug Channel -- The ABCs (and Ds) of Drug Pricing
Navigating the Drug Channel - An Overview: Getting to the Other Side
U.S. Healthcare Stats Quarterly: First-Quarter 2012
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