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CVS Joins Hands with Cardinal Health

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CVS Caremark Corporation (CVS - Free Report) , the largest healthcare pharmacy provider in the U.S, recently inked a 50/50 joint venture agreement with Cardinal Health, Inc. (CAH - Free Report) to form the largest generic sourcing entity in the U.S. Under the agreement, both the companies have agreed to contribute their sourcing and supply chain expertise. The companies have also renewed their existing pharmaceutical distribution contract and extended it for three years through Jun 2019.

The JV deal is subject to the signing of final documents and certain other closing conditions. Share prices of both the companies rose on the announcement, with CVS Caremark rising 0.22% to $68.14 on Dec 11, and CAH closing the session at $66.23, reflecting a marginal rise of 0.01%.

The U.S.-based joint venture is expected to be operational from Jul 1, 2014 and is set to span across an initial term of 10 years. Per the deal, Cardinal Health is stipulated to make a quarterly payment of $25 million to CVS Caremark across the term of the agreement. The payments have an estimated after-tax present value of $435 million. However, no physical assets (e.g., property, plant or equipment), from either parties, will be part of the agreement. Also, a minimal funding is being provided to capitalize the entity.

Drugstores and pharmacy benefits managers like CVS Caremark have been persistently trying to enter the U.S. generic drug market, the largest in the world. The market is anticipated to grow at 10% during 2010-13. A large number of patent expiries for innovator drugs, many of them highly popular, have also contributed to the industry’s growth. Moreover, enhanced government support in the form of incentives and approvals can also be accounted for the recent boom in this market.

The alliance will help both the companies develop new and unique purchasing strategies with generic manufacturers. Such developments will, in turn, favorably impact both volume and efficiency, which was the primary focus of this partnership. Both CVS Caremark and Cardinal Health hope to hold their respective leadership positions while steering through the evolving generic drug market in the U.S.

CVS Caremark currently has a Zacks Rank #3 (Hold), while Cardinal Health carries a Zacks Rank #2 (Buy). Investors interested in the medical/dental supplies industry can look at stocks like Align Technology Inc. (ALGN - Free Report) and McKesson Corporation (MCK - Free Report) , both carrying a Zacks Rank #1 (Strong Buy).

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