Wholesaler Impact of a Longs Drug Deal

As a quick follow to yesterday’s post about the fate of Longs Drug Stores (LDG), I thought it would be fun (!) to look at the potential impact on the company’s wholesaler.

Right now, Longs buys more than 90% of its pharmaceuticals from AmerisourceBergen (ABC) under a long-term contract, which includes a minimum purchase requirement over the contract term. Don’t worry, I’m not spilling any secrets here – you can read about it yourself in Long’s most recent 10-K filing.

Based on the public data, I estimate that Long’s represents less than 3% of ABC’s total drug distribution revenues.

Nonetheless, the post-contract outcome for ABC will probably be negative regardless of whether the buyer is CVS Caremark (CVS) or Walgreens (WAG). The eventual buyer will presumably want to consolidate purchasing volumes for brand drugs with its primary wholesaler while shifting generic purchases to direct relationships with manufacturers. See CVS' Channel Power for a case study of supplier consolidation when CVS and Caremark came together.

Here’s a quick rundown on current wholesaler relationships for brand supply at CVS and WAG:

• CVS Caremark is now the single largest customer of both McKesson (primarily Caremark/Pharmacare mail) and Cardinal Health (primarily CVS retail). CVS Caremark will decide its brand purchasing strategy no later than mid-2009.
• Walgreens is the second largest customer of Cardinal Health. The companies signed a three year contract renewal in January 2008 that will shift an estimated $2 billion in business from ABC to CAH.

No matter how you slice it, the sale of Longs Drug Stores will be one more step in the ongoing consolidation of the pharmacy supply chain.