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Companies will form a 50-50 joint venture to share generics sourcing
First, AmerisourceBergen and Walgreens linked their sourcing operations; then McKesson put a bid to buy Celesio, a German distributor and drug retailer (but there are rumblings that that acquisition might have problems). Now Cardinal Health has made its move to establish a stronger position in the US market for generics sourcing. In the deal announced on Dec. 10, Cardinal and CVS Caremark will essentially pool their generics purchasing through a j.v. from which they will both acquire drug supplies. It creates, the companies say, “the largest generic sourcing entity in the US, which is the world’s largest generic drug market.”
From outside the world of US wholesale distribution, the deal is something of a head-scratcher. Cardinal already supplies CVS Caremark—the largest pharmacy-benefit provider in the US—in a conventional wholesaler-retailer relationship. Even stranger, Cardinal is agreeing to pay CVS Caremark $25 million quarterly over the life of the contract, expected to last 10 years. And there will be no physical assets contributed by either company to the j.v, and “minimal” capital funding. Another quirky element is that the companies also announced a three-year extension of CVS Caremark’s regular client relationship with Cardinal, through 2019, which creates the (unlikely) prospect that the j.v. will be making purchases for CVS Caremark through 2023 while Cardinal might not be its primary generics supplier after 2019.
What gives the deal its logic is the dynamics of generics purchasing and distribution, where the others of the Big Three wholesalers are consolidating drug purchasing by pairing up with retailers. In recent years, even while the branded-pharma business has seen tens of billions of dollars removed from the market annually by patent expiries, generics have been sold for higher margins than branded products by both wholesalers and retailers. Now, those higher margins will be under greater pressure; with fewer buyers, generics producers will be forced to cut their already-low prices. Presumably, some of those savings will be passed on to retail customers.
Wall Street analysts generally liked the deal, saying that it would be accretive to Cardinal Health’s earnings; both companies’ stock prices rose slightly after the announcement. Industry analyst (and Pharmaceutical Commerce Editorial Board member) Adam Fein called the deal a “win-win” for both companies, in that it will generate cost savings in drug purchasing for them. In the companies’ joint statement, Larry Merlo, CVS Caremark CEO, said that the deal will enable the companies to “develop innovative purchasing strategies … and enhance supply chain efficiencies.” But, given the already enormous volumes of products flowing through the two companies (CVS Caremark fills roughly one out of four US prescriptions annually), it’s hard to see what further efficiencies are possible, except for aggressively driving down prices. Good news for payers and consumers; potential bad news for generics manufacturers.
The Cardinal Health-CVS Caremark deal differs from what McKesson and AmerisourceBergen are bidding to do, which is consolidate drug purchasing and distribution internationally. The AmerisourceBergen-Walgreens hookup also brings along UK-based Alliance Boots, a major wholesaler and retailer there are elsewhere in the world; Walgreens and Alliance Boots have a longer-term merger agreement. (In other news this week, a hedge fund that owns nearly 25% of Celesio is pressuring McKesson to sweeten its $8.3-billion bid, and since McKesson’s bid is contingent on garnering at least 75% of the outstanding shares, there could be a standoff.) Cardinal has made a significant investment in wholesale distribution in China, and CVS Caremark has some non-US business, but the deal between the two of them is very US-centric.
Broadly speaking, generics pricing outside the US is higher than inside it; the US has led most of the developed world in adopting generic products—but other nations are catching up fast.