McKesson deepens and extends supply relationship with Rite Aid chain

Drug wholesaling—specifically the generics portion (which accounts for almost 90% of drug prescriptions in the US)—continues to evolve as the Big Three wholesalers reduce their competition every year for supply contracts with major drug chains, and instead create longer-term partnering agreements with key customers. The latest is McKesson, which has announced a five-year agreement with Rite Aid (the No. 3 chain in the US). Besides the extended term, the agreement gives McKesson “responsibility for the sourcing and distribution of generic pharmaceuticals … as part of the proprietary McKesson One Stop Generics program,” according to a McKesson statement.

“We are excited to expand our partnership with McKesson,” said John Standley, Rite Aid’s chairman and CEO. “The combination of Rite Aid’s and McKesson’s generic purchasing scale and sourcing expertise, in conjunction with McKesson’s industry-leading drug distribution capabilities, will enable us to achieve supply chain efficiencies, provide even better service to Rite Aid customers, and generate additional cash flow to fuel our company’s growth.”

Branded pharmaceuticals will continue to be supplied by the Big Three wholesalers to other chains and customers; the main focus of the McKesson and other agreements is to consolidate generic drug purchasing in as large a chunk as possible. In AmerisourceBergen’s cases, that includes drug sourcing in Europe, through the partnership between ABC, Walgreens and Alliance Boots. McKesson has responded to that year-old agreement by finalizing its purchase of Celesio, which concluded in early February after a second round of negotiations with Celesio bondholders.

The McKesson-Rite Aid agreement further tightens the buyer’s market for generics, which will intensify the pressure on generics manufacturers—fewer, bigger customers means the price-cutting that has been endemic in generics manufacturing for years will not let up. Generics manufacturers are also coming off a multi-year “patent cliff” period, when a higher-than-usual number of branded products had their patents expire. Depending on the product and the terms under which the branded drug goes off-patent, a generics maker enjoys a brief period of exclusivity for the generic product, followed by an all-in scramble from other generics competitors.