For Cardinal, this news is a big relief following the loss of Express Scripts and Walgreens. As I suggest in Making Sense of ABC-Walgreens-Alliance Boots, the loss of two large, low-profit customers could turn out to be a blessing in disguise.
The renewal also demonstrates wholesalers' value in the brand-name pharmacy supply chain. In theory, the largest self-warehousing chain drugstores and mail pharmacies have the size and scale to perform the functions of drug wholesale distribution. Yet in 2012-13, these larger companies all elected to buy brand-name drugs via a drug wholesaler rather than directly from a manufacturer.
No details about the economics. We can presume that CVS Caremark got a slightly better deal vs. its current agreement, although the economics are not as straightforward as you might expect. Read on for some quick context.
Here are the official news releases:
- CVS Caremark is McKesson's single biggest customer. In 2012, CVS Caremark accounted for an estimated 18.5% of the company’s U.S. core drug distribution revenues. See Exhibit 56 (page 109) of the 2012-13 Economic Report on Pharmaceutical Wholesalers.
- CVS Caremark is also Cardinal Health's biggest customer. In 2012, CVS Caremark accounted for an estimated 24.6% of the company's total U.S. core drug distribution revenues and services. See Exhibit 50 (page 98) of my wholesaler report. Following the customer losses, I estimate that CVS Caremark will be 35% to 40% of core distribution.
Even if a manufacturer limits or removes the value of a wholesaler’s inventory appreciation, wholesalers still benefit from price inflation, because agreements with brand manufacturers are still computed using pharmaceutical list prices. Therefore, the dollar value of a wholesaler’s quarterly fee payment from the manufacturer rises whenever a manufacturer increases a drug’s list price—the Wholesale Acquisition Cost (WAC). Thus, large customers periodically renegotiate their wholesaler contracts to gain the value of these incremental profits.
I'll update if any new details emerge. In the meantime, check out a video from the consultant who advised CVS Caremark. Click here if you can't see the video.