CVS, Cardinal Health Forge Generic Drug Deal

Health CareReuters

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.

Continue Reading Below

"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 research note.

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 said.

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.