Now calling itself the “largest generic-sourcing entity” in the U.S., Cardinal Health Inc., the second largest U.S. drug distributor and CVS Caremark Corp., the largest supplier of prescription drugs, have teamed up in a joint venture aimed at buying generic drugs on the international market, and selling them in the U.S. market. The move is expected to raise both companies’ value while also finding savings in the medical system, which could translate into savings for consumers.
The 10-year venture will utilize both companies’ negotiating power to obtain generic drugs from their manufacturers for cheaper prices. With both companies’ combined annual spending between $12 billion and $14 billion, these savings could amount to between $450 million and $600 million each year, The Columbus Dispatch reported. In order for the venture to be owned equally, Cardinal Health will also pay CVS quarterly payments of $25 million. “They are considerably larger than we are as a purchaser,” George Barrett, Cardinal Health’s CEO and chairman, told The Columbus Dispatch. “It was very important for us to have a 50/50 relationship [in which] we had equitable value sharing.”
These savings will likely be passed down to the customers, as there has been a shift toward reducing health care costs. There are currently 10,000 people each day becoming eligible for Medicare, Barrett told The Dispatch. Add to that another 11 million people already over the age of 80, those who will be over 80 in the coming years, and the millions of Americans who will be obtaining health care benefits through the Affordable Care Act, and branded prescription drugs start to sound a whole lot more expensive, for both the suppliers and consumers, he said.
The trick, Barrett said, is to determine how to put their plan into action by its expected launch date of July 1, 2014. “The topic du jour is finding friends along the drug supply chain and looking for ways to add value,” Jennifer Lynch, an analyst with BMO Capital Markets in New York, told Bloomberg. “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.”
The move also puts Cardinal Health and CVS alongside their competitors. Last year, Cardinal Health lost its contract to AmerisourceBergen Corp., the third-largest drug distributor, and then lost other opportunities when both Walgreens and European drug company Alliance Boots GmbH both signed agreements to get branded and generic products from AmerisourceBergen, The Wall Street Journal reported.