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CVS Caremark, Cardinal Enter 10-Year Joint Venture

Wed, 12/11/2013 - 9:07am
The Associated Press

CVS Caremark and prescription drug distributor Cardinal Health are combining their buying power through a 10-year joint venture to purchase generic medicines.

The joint venture will become active in July and will negotiate supply contracts for both Dublin, Ohio-based Cardinal and CVS Caremark, the nation's second largest drugstore chain and one of the largest pharmacy benefits managers.

Cardinal will make $25 million quarterly payments to CVS Caremark, which is headquartered in Woonsocket, R.I., over the life of the contract. Those payments boil down to a total of about $435 million after taxes.

The 50/50 joint venture is expected to give both companies greater leverage when negotiating prices with generic drugmakers. It could add 5 cents per share or more to CVS Caremark's annual earnings, said Gabelli Funds Portfolio Manager Jeff Jonas, who follows CVS Caremark.

CVS Caremark runs more than 7,600 stores and trails only Walgreen Co. in terms of size.

Drugstores and pharmacy benefits managers have been hit with a wave of generic drugs over the past few years as popular brand-name medications like the cholesterol fighter Lipitor lost patent protection. These cheaper generic drugs have hurt pharmacy revenues but they also help earnings because they come with a larger margin between the cost the company pays for the drug and the reimbursement it receives.

For Cardinal, the agreement will help it provide better generics pricing to independent pharmacy customers, Sterne Agee analyst Greg Bolan said.

Earlier this year, Walgreen announced its own 10-year supply deal with pharmaceutical wholesaler AmerisourceBergen Corp. Under that deal, AmerisourceBergen supplies Walgreen with both branded and generic drugs for its drugstores and mail order and specialty pharmacy businesses. Walgreen runs nearly 8,200 drugstores.

Analysts said when that deal was announced that the agreement gave Walgreen better rates than an agreement it had with Cardinal.

Shares of Cardinal Health Inc. climbed 3.3 percent, or $2.10, to $66.37 Tuesday while CVS Caremark Corp. rose nearly 2 percent, or $1.20, to $67.93. Meanwhile, broader trading indexes fell slightly.

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