CVS Caremark Corp. and Cardinal Health Inc. plan to form a joint venture that they say will be the largest generic drug sourcing entity in the United States.

CVS Caremark, Cardinal Health, joint venture, generic drug sourcing, Larry Merlo, George Barrett, pharmaceuticals, health care, U.S. generics market, pharmaceutical distribution, pharmacy care, medical products

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CVS, Cardinal Health to form generics joint venture

December 10th, 2013

DUBLIN, Ohio, and WOONSOCKET, R.I. – CVS Caremark Corp. and Cardinal Health Inc. plan to form a joint venture that they say will be the largest generic drug sourcing entity in the United States.

The companies said Tuesday that the 50/50 joint venture will source and negotiate generic supply contracts with generic drug manufacturers for both Cardinal Health and CVS Caremark. The new entity is slated to be operational as soon as July 1, 2014, and will have an initial term of 10 years.

"Cardinal Health has been an outstanding strategic partner over many years, and we are excited to form this new venture with them," CVS Caremark president and chief executive officer Larry Merlo said in a statement. "This partnership will enable us to maintain our leadership role in navigating the dynamic U.S. generics market. With its combined volume and capabilities, the joint venture will develop innovative purchasing strategies with generic manufacturers and enhance supply chain efficiencies."

Also on Tuesday, the companies announced a three-year extension through June 30, 2019, of Cardinal's current pharmaceutical distribution agreements with CVS Caremark.

The companies noted that the joint venture will maintain their current leadership positions. CVS Caremark is the nation's largest pharmacy care provider, filling more than a billion prescriptions last year through its retail and mail order pharmacies. Cardinal Health supplies pharmaceuticals and medical products to over 100,000 health provider and pharmacy locations daily.

"We are excited to see our long-standing relationship with CVS Caremark expand to include this joint venture, which further enables both companies to focus on improving the cost-effectiveness of health care," stated George Barrett, chairman and CEO of Cardinal Health. "This venture is an extremely compelling combination, where volume and efficiency matter. All customers will benefit from the enhanced volume and sourcing capabilities created by this partnership."

In line with the 50/50 joint venture, the deal includes a quarterly payment of $25 million over the life of the agreement from Cardinal to CVS Caremark. The payments have an estimated after-tax present value of $435 million, the companies said.

CVS Caremark and Cardinal said no physical assets — such as property, plants or equipment — are being contributed by either company to the joint venture, and minimal funding is being provided to capitalize the entity. The companies also noted that they will continue to manage their product orders and logistics processes in the same manner as they do currently.

The venture is subject to the completion of final documentation and customary closing conditions, the companies added.

CVS Caremark and Cardinal Health's venture marks the latest major deal aimed at amassing scale in the supply of pharmaceuticals, a sector that is seeing prices come down amid the influx of new generic products and demand rise for more affordable offerings as health care reform takes hold.

In October, McKesson Corp. announced plans to buy Germany-based pharmaceutical distributor Celesio in a deal valued at $8.3 billion. The agreement stands to bring together the biggest U.S. drug distributor with one of the world's largest wholesalers and providers of logistics and services to the pharmaceutical and health care sectors.

And in March, partners Walgreen Co. and Alliance Boots unveiled a long-term partnership with AmerisourceBergen Corp. that includes an expanded pharmaceutical distribution pact for Walgreens, global supply-chain opportunities with the Walgreens-Boots joint venture, and the right for the joint venture partners to buy an equity stake in AmerisourceBergen. As of early September, AmerisourceBergen became the primary supplier of branded drugs to Walgreens under their 10-year primary distribution agreement. Also under that pact, AmerisourceBergen will be assuming primary distribution of all generic drugs to Walgreens.