Thursday, September 20, 2007

CAH + AB = ??

Cardinal Health (CAH) and Alliance Boots (AB) just announced an agreement to bring AB’s Almus brand of generic drugs to the U.S. market. See Alliance Boots, Cardinal Health Announce Joint Sourcing and Marketing Agreement.

This agreement could be merely routine – or the beginning of something very significant.

Private Labels Come to Pharma
If Almus is merely another generic supplier to Cardinal, then today’s announcement is only mildly interesting. AB’s success with Almus should not shock anyone who read my new book Facing the Forces of Change®: Lead the Way in the Supply Chain. I found that private label products (products branded by a wholesaler) will be expanding substantially in all industries over the next five years.

The economics are straightforward. A private label generic drug increases profits because the channel captures the margin that would otherwise flow to an upstream generic drug maker. The wholesaler—Alliance Boots in the case—also gains the ability to control the entire profit stream from production to sale, allowing for more flexible internal sales compensation models and higher commissions to drive sales.

Going Global
The big three wholesalers—AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson Corp (MCK)—already have active private label programs in other parts of their business. In fact, McKesson’s private label EverFRESH toothpaste got caught up in this summer’s tainted food recall after laboratory tests found small amounts of diethylene glycol.

From my point of view, it’s inevitable that wholesalers will be moving closer to production in order to source products for which there is limited brand preference. It’s not a stretch to imagine the combination of a generic manufacturer and wholesaler.

Seen in this light, today’s announcement may signal that Cardinal is gaining a bigger foothold in the global sourcing market. Such a move would give them the opportunity to sell generics in high volume to large pharmacy buyers sourcing directly from generic drug makers. (See CVS' Channel Power.)

Here's another idea to ponder. Alliance Boots recently entered the Chinese market and is planning to enter India. I already warned you over the summer that The British are Coming. So, could this agreement signal the beginning of a more significant relationship between Cardinal and Alliance Boots?

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