New Cardinal and McKesson Customer Deals Show A Changing Generic Channel

In July, I highlighted how payer and pharmacy consolidation will affect drug wholesalers. As I detail below, two big acquirers—OptumRx and Albertsons—are both switching primary wholesalers and simultaneously migrating their generic purchasing to the wholesale channel.

These latest deals show how generic purchasing consortia are accelerating business alignment between pharmacies and their wholesaler suppliers.

The deals also signal further generic purchasing consolidation. For both brand-name and generic drug manufacturers, a robust channel strategy function is more important than ever.

MARRIED…

Over the past three years, the big three wholesalers—AmerisourceBergen, Cardinal Health, and McKesson—have established novel generic purchasing relationships with their largest customers:

• Walgreens Boots Alliance (with AmerisourceBergen)

• The Red Oak joint venture between Cardinal Health and CVS Health

• McKesson’s OneStop generic program, which is now utilized by Rite Aid. In 2015, McKesson established McKesson Global Procurement & Sourcing Limited, a London-based subsidiary focused on manufacturer negotiations.

These three buyers accounted for more than three-quarters of total U.S. generic drug purchases from manufacturers. (See Exhibit 95 of our 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies.)

..WITH GENERICS

Large pharmacies have historically purchased generics directly from manufacturers, rather than through the wholesale channel. The purchasing scale associated with recent purchasing combinations are changing this pattern, enabling wholesalers to become key suppliers of both brand-name and generic drugs.

The two most recent deals exemplify this trend:

• Albertsons—Albertsons is a long-time McKesson customer, but Safeway is supplied by Cardinal Health, which won the business from McKesson in 2012. In April 2016, McKesson will begin supplying the combined business of Albertsons and Safeway. Notably, Albertsons will purchase both brand-name and generic drugs from McKesson. Read the press release. 

• OptumRx— In July 2015, OptumRx completed its previously-announced acquisition of PBM Catamaran. Last month, Cardinal Health announced a multi-year agreement with OptumRx to supply generic and brand pharmaceuticals to OptumRx's mail and specialty pharmacies, including the Catamaran business. Before the acquisition, McKesson had been supplying brand-name drugs to OptumRx, Cardinal Health had been supplying brand-name drugs to Catamaran, and OptumRx had purchased generics directly from manufacturers. Read the oddly terse announcement.

A few other observations:

• Other large buyers such as Fred’s and Omnicare have already migrated their generic purchasing to wholesalers. The next round could include such direct generic buyers as Walmart, Kroger, Prime Therapeutics, Costco, Kmart, and more.

• Tim Wentworth, who will become Express Scripts new CEO next year, may shake up ESI’s purchasing strategy. AmerisourceBergen’s Express Scripts contract, which includes brand-name drugs and was scheduled to expire on September 30, 2015, was extended for one year under the same terms.

• AmerisourceBergen hasn’t notched the same generic wins that its peers have. Recent customer losses include PharMerica, which switched to Cardinal, and American Pharmacy Services Cooperative (APCS), which switched to McKesson. We further estimate that ABC’s share with smaller pharmacies has declined.

LET’S ROCK!

I highlighted the emerging retail-wholesale alignment trend in February 2014’s McKesson, Rite Aid, and the Changing Generic Channel.

Other trends also point to the deepening relationships between wholesalers and the dispensing channels. Walgreens and Rite Aid have eliminated self-distribution capabilities for pharmaceuticals. Consequently, full-line wholesalers have become virtually impossible to displace for primary care products dispensed by retail pharmacies.

Wholesalers are also coordinating more closely with smaller, pharmacist-owned independent drugstores. Over the past 10 years, for instance, McKesson’s Health Mart franchise has grown from 250 pharmacies to more than 4,000 pharmacies. Health Mart is now larger than ABC’s Good Neighbor Pharmacy group.

I’ll have more details on changing relationships between wholesalers and retail chains in our new 2015-16 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, coming soon. In the meantime, grab the remote, settle into your couch, put your hand in your waistband, and wonder what's coming next.