The deal marks a second extension of Rite Aid and McKesson’s primary distribution relationship. The companies had renewed their distribution pact in the latter part of 2012, extending it three years to the end of March 2016.
Under the new agreement announced this week, McKesson will take over the sourcing and distribution of generic pharmaceuticals for Rite Aid as part of the McKesson OneStop Generics program. Rite Aid is the nation’s third-largest drug chain, with nearly 4,600 drug stores in 31 states and the District of Columbia.
“We are excited to expand our partnership with McKesson,” Rite Aid chairman and chief executive officer John Standley said in a statement. “The combination of Rite Aid’s and McKesson’s generic purchasing scale and sourcing expertise, in conjunction with McKesson’s industry-leading drug distribution capabilities, will enable us to achieve supply chain efficiencies, provide even better service to Rite Aid customers, and generate additional cash flow to fuel our company’s growth.”
McKesson noted that Rite Aid drug stores will benefit from its daily, direct-to-store delivery service model for branded and generic drugs, ensuring a high level of service for the drug chain’s customers.
“I am extremely proud of McKesson’s industry-leading service levels and the strength of our global sourcing and supply chain capabilities, which mean that we deliver the right products at the right time with exceptional efficiency for our customers,” stated John Hammergren, chairman and CEO of McKesson. “Rite Aid has been a valued customer to McKesson for more than 16 years, and I am honored at the trust they have placed in us as we expand our partnership.”
Along with CVS Caremark Corp. and Walmart, Rite Aid is one of McKesson’s largest customers. In a research note, Zacks Investment Research said that Rite Aid has been McKesson’s customer for more than 16 years and, during fiscal 2013, the drug chain bought branded drugs and some generics for 88.7% of the dollar volume of its prescription drugs from McKesson under their existing supply contract.
CVS, McKesson’s biggest customer, accounted for 17% of the pharmaceutical distributor’s total sales in its 2013 fiscal year ended March 31. CVS and McKesson announced a renewed distribution pact in April 2013.
In recent years, both drug wholesalers and drug chains have increasingly focused on building scale amid an influx of new generic drugs — which have lower prices but higher profit margins — and shrinking branded drug margins and pharmaceutical reimbursements. The changing landscape has led to several high-profile combinations.
CVS Caremark and Cardinal Health in December unveiled a deal to form a joint venture that they said will be the nation’s largest generic drug sourcing entity. The 50/50 venture will source and negotiate generic supply contracts with generics 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.
Last March, partners Walgreen Co. and Alliance Boots announced 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.
And on the global front, McKesson last month reached an agreement with Franz Haniel & Cie. GmbH to acquire all of its shares in Germany-based pharmaceutical distributor Celesio. The deal brings together the biggest U.S. pharmaceutical distributor with one of the world’s largest wholesalers and providers of logistics and services to the pharmaceutical and health care sectors.
In an interview last October, Standley acknowledged the rising importance of scale and the need to take a longer view as health care becomes a bigger part of the chain drug business model. Rite Aid has seen its chief rivals reshape their business models: the 2007 merger of CVS and Caremark and, more recently, the partnership between Walgreens, Alliance Boots and AmerisourceBergen.
“Strategic partnerships are going to be important to us as we look forward. One of the things we look at — certainly with CVS Caremark and Walgreens/Alliance Boots/AmerisourceBergen, and even with Econdisc — is that scale can be key in today’s environment,” Standley told Chain Drug Review. “So that fuels an ongoing dialogue about how to go to market in the most efficient way and how to build the right relationships and partnerships to drive those efficiencies.”
According to Fitch Ratings, the trend in pharmaceuticals is toward partnerships, alignment and growing scale to rein in costs in an “increasingly constrained reimbursement environment.”
“The Rite Aid agreement will further enhance McKesson’s drug purchasing scale and will allow Rite Aid to tap into the resulting cost savings,” Fitch said in a research note. “Notably, unlike other drug channel participants that have largely become parties to purchasing joint ventures (JVs), McKesson will not be forced to share these cost savings with partners. Fitch estimates that McKesson’s generic drug purchasing power, including Celesio and Rite Aid, will rival that of the JV among Walgreen Co., Alliance Boots GmbH and AmerisourceBergen Corp. in the next couple of years.”
Editor’s Note: Article updated with analyst comment.