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CVS, Cardinal Health To Start Generic Drug Supplier

CVS Caremark Corp.
CVS Caremark Corp., the largest supplier of prescription drugs in the U.S., is based in Woonsocket, Rhode Island. Photographer: David Paul Morris/Bloomberg

CVS Caremark Corp., the largest supplier of prescription drugs in the U.S., and Cardinal Health Inc. plan to start a venture that will be the biggest source of generic medicines in the country.

The venture, set to debut as soon as July 1, will be owned equally by Cardinal Health, the second-biggest U.S. drug distributor, and CVS, the companies said in a statement today. Cardinal Health agreed to make a quarterly payment of $25 million to CVS over the life of the 10-year pact.

CVS and Cardinal Health will combine forces to negotiate better rates from generic-medicine makers and find savings in the medical system. The move follows similar agreements among AmerisourceBergen Corp., the third-largest drug distributor, Walgreen Co. and European drugstore chain Alliance Boots GmbH. McKesson Corp, the leading U.S. drug distributor, is in the midst of acquiring Germany’s Celesio AG for $5.4 billion.

“The topic du jour is finding friends along the drug supply chain and looking for ways to add value,” said Jennifer Lynch, an analyst with BMO Capital Markets in New York, in a telephone interview. “You’re taking two parts of the supply chain and putting them together and we’re hopeful it also allows them in some way, shape or form to get creative on the delivery side as well in terms of finding efficiencies.”

Shares React

Cardinal Health, based in Dublin, Ohio, fell less than 1 percent to $64.13 at the close of New York trading. CVS climbed 1.9 percent to $67.99.

The agreement sent shares of generic-drug makers down, with Mylan Inc. dropping 2.9 percent and Actavis falling 1.6 percent. Mylan, based in Canonsburg, Pennsylvania, closed at $42.61. Parsipanny, New Jersey-based Actavis fell to $163.55

Cardinal and Woonsocket, Rhode Island-based CVS will combine sourcing and supply chain expertise for the venture. No physical assets will be contributed to the enterprise. The combination could save the companies $450 million to $600 million a year, said Ross Muken, an analyst with International Strategy & Investment Group.

“We view today’s announcement as an unmitigated positive as the joint venture lowers Cardinal’s generic acquisition costs,” Muken said in a note to clients today.

The companies have a close financial relationship. Cardinal gets 23 percent of its sales from CVS, according to data compiled by Bloomberg. The venture isn’t necessarily a prelude to a merger, Lynch said. CVS has a supply agreement with McKesson and has said it likes the flexibility of dealing with more than one distributor, said BMO’s Lynch.

“This partnership will enable us to maintain our leadership role in navigating the dynamic U.S. generics market,” which is the world’s largest, CVS Chief Executive Officer Larry J. Merlo said. “With its combined volume and capabilities, the joint venture will develop innovative purchasing strategies with generic manufacturers and enhance supply chain efficiencies.”

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