CVS, the largest pharmacy chain in the US, and Cardinal Health Inc, the pharmaceutical distributor, announced Tuesday a 10-year agreement to join forces and form the biggest drug sourcing operation in the United States, which, incidentally, is the largest generic drug market.
Both companies are coming in it as equals, 50-50, combining the generic drug purchasing power of both giants in the market for the cheaper medicines. The venture is set to take effect from as soon as July 1, 2014.
Cardinal will, under the agreement, 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.
Lisa Gill, JP Morgan analyst, said in a note: "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."
Under the agreement it was also announced that the companies agreed to a three-year extension of their existing distribution agreements, taking them through June 2019.
The North American market for medicines has seen a significant 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.
According to Reuters, generic drugs now account for more than 80 percent of all prescriptions filled, according to data from IMS Health, which tracks prescription drug data.
Frank Morgan, RBC Capital Markets analyst, told Reuters that 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," he 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.
