WOONSOCKET, R.I. — CVS Caremark Corp. and Cardinal Health Inc. have inked a deal to form the largest generic drug sourcing entity in the United States, which is the world’s largest generics market.
Both companies are contributing their sourcing and supply chain expertise to the 50/50 joint venture and are committing to source generics through it. Separately, they announced a three-year extension, through June 2019, of Cardinal Health’s existing pharmaceutical distribution agreements with CVS Caremark.
The U.S.-based joint venture is expected to be operational as soon as July 1 and will have an initial term of 10 years.
Under the arrangement, the joint venture will source and negotiate generic drug supply contracts for both Cardinal Health and CVS Caremark.
To reflect an equitable 50/50 joint venture, the agreement includes a quarterly payment of $25 million over the life of the agreement from Cardinal Health to CVS Caremark. The payments have an estimated after-tax present value of $435 million.
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 said. The venture is subject to the completion of final documentation and customary closing conditions.
CVS Caremark filled more than 1 billion prescriptions through its retail and mail order pharmacies in 2012. According to the companies, the joint venture will maintain CVS Caremark and Cardinal Health’s leadership positions as they drive value for their customers, clients and shareholders in a capital-efficient manner.
“Cardinal Health has been an outstanding strategic partner over many years, and we are excited to form this new venture with them,” said CVS Caremark president and chief executive officer Larry Merlo.
“This partnership will enable us to maintain our leadership role in navigating the dynamic U.S. generics market,” Merlo added. “With its combined volume and capabilities, the joint venture will develop innovative purchasing strategies with generic manufacturers and enhance supply chain efficiencies.”
Cardinal Health chairman and CEO George Barrett remarked,“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.
“This venture is an extremely compelling combination where volume and efficiency matter,” Barrett noted. “All customers will benefit from the enhanced volume and sourcing capabilities created by this partnership.”
The pact is the latest aimed at amassing scale in drug distribution, a sector that is seeing prices come down amid the influx of new generic products and rising demand 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.
In March partners Walgreen Co. and Alliance Boots unveiled a long-term partnership with AmerisourceBergen Corp. that includes an expanded pharmaceutical distribution agreement for Walgreens, global supply-chain opportunities with the Walgreens-Alliance 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. The agreement will also see AmerisourceBergen assume primary distribution of all generic drugs to Walgreens.
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