Monday, June 15, 2009

Cardinal-CVS Deal Almost Done

Last week, Cardinal Health's (CAH) CEO George Barrett strongly hinted that the company's brand drug wholesale supply contract with CVS Caremark (CVS) is almost done. As far as I know, this is the first public statement by any wholesaler about the status of this mega-contract.

As expected, Cardinal will face some "margin erosion" (their words) from the renewal as CVS flexes its buying power. See the "Pricing/Customer Renewals" section of Profit Headwinds for Cardinal Health for background or my 2007 post CVS' Channel Power for an example.

Mr. Barrett heavily qualified his comments, but the message seems pretty clear. Here's what he said:

There is actually a lot that I cannot say. And the reason I cannot say too much is that we are actually not done with this process. CVS has to run this not just with Cardinal but with other players in the mix.

Having said that, we are at very late stages. I have made some assumptions as we look at our early thinking about 2010 about that going forward. And I feel fairly comfortable that those conversations are going in the right direction, and that before long, we will say this deal is done. (emphasis added)

Still no word from McKesson (MCK), which has the mail supply business of Caremark and Pharmacare. Note that these agreements only focus on brand drugs because CVS Caremark buys generics directly from manufacturers, bypassing wholesalers. Again, see CVS' Channel Power.

You can read the full transcript for yourself at "Cardinal Health, Inc. at Goldman Sachs Global Healthcare Conference" on the Investor Relations page of their website. (Sorry, no direct link.)

BTW, I want to publicly thank Cardinal's investor relations team for providing so much useful stuff on their website. None of the other wholesalers provide meeting transcripts and some do not even post presentation slides in PDF format.

And in case you were wondering, neither George Barrett nor Tom Ryan are pictured in the photo above.

4 comments:

  1. AnonymousJune 15, 2009

    Thanks for the heads up, Adam. I have not seen this information anywhere else. Any details on the length of the CVS agreement? Do you know when Mckesson will be making an announcement?

    ReplyDelete
  2. AnonymousJune 15, 2009

    Amazing that the wholesalers still have no pricing discipline! Just goes to show how commoditized they are in the market. Then again, what is the real value moving a box from a Cardinal DC to a CVS DC?

    On a somewhat related note, I came across an interesting piece of intelligence on the public web a few weeks ago. It is a justification letter from the VA to the CBO dated Feb 29, 2009 on why they are fine in their prime vendor relationship with McKesson. Check out the pricing offered by the big 3 on page 5. http://www.cbo.gov/ftpdocs/100xx/doc10009/02-25-VA_Vendor_Letter.pdf

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  3. AnonymousJune 15, 2009

    Interesting reading the VA info. But we all knew it was heavily discounted. What gets me is how the manufacturers are not considering this a cost reduction to their pricing and thus adding it into the calculations! They claim it is a cost but clearly it is passed on making it a discount. I am also amazed at the disparity in the payments by the manufacturers. If they only knew! What a mess.

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  4. Official announcement from cardinal today (July 6, 2009):

    Cardinal Health Renews Distribution Agreement With CVS Caremark

    DUBLIN, Ohio, July 6 /PRNewswire-FirstCall/ -- Cardinal Health today announced it has renewed its distribution agreement with CVS Caremark to supply pharmaceuticals to its national network of retail pharmacies through mid-2013.

    "We have a long-standing partnership with CVS Caremark, and we are proud to continue this important relationship," said George Barrett, vice chairman of Cardinal Health and chief executive officer of the Healthcare Supply Chain Services segment. "The footprint of the agreement is expected to be fundamentally the same as our existing relationship, and the economic terms for Cardinal Health were already incorporated into our previous disclosure for fiscal 2010, given during our Investor Day event on June 2."

    Additional terms of the agreement were not disclosed.

    Source

    Adam

    ReplyDelete

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