Express Scripts Seeks Bids For Potential $20 Billion/Year Contract

Date : 04/26/2012 @ 5:18PM
Source : Dow Jones News
Stock : Cardinal Health, Inc. (CAH)
Quote : 73.1  0.0 (0.00%) @ 8:41AM

Express Scripts Seeks Bids For Potential $20 Billion/Year Contract

Express Scripts Holding Company (MM) (NASDAQ:ESRX)
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Pharmacy-benefit manager Express Scripts Holding Co. (ESRX) is seeking proposals from drug distributors to handle business for itself and newly acquired Medco Health Solutions Inc. that could be worth about $20 billion in yearly sales.

Distributor AmerisourceBergen Corp. (ABC) currently serves Medco while a competitor, Cardinal Health Inc. (CAH), serves Express Scripts. Either company could lose their current business, but could also gain more if they pick up a bigger contract for the now-larger Express Scripts.

An Express Scripts spokesman declined to discuss potential contract terms, including how long it will last, but confirmed the company is seeking bids. Both Cardinal and AmerisourceBergen--which estimated the annual contract value during its earnings call Thursday--said they are competing for new business that would start Oct. 1. AmerisourceBergen also indicated there could be more than one new contract.

Under this type of deal, the drug distributors provide medication to home-delivery pharmacies run by Express Scripts and Medco.

For AmerisourceBergen, which received about 19% of sales and 5% of earnings from Medco in its last fiscal year, the potential business loss emerged as a threat after Express Scripts announced plans to purchase Medco last summer. Those companies wrapped up their deal in early April after a long antitrust regulatory review.

J.P. Morgan analyst Lisa Gill estimated the Express Scripts business amounts to about 2% to 3% of Cardinal Health's per-share earnings. Winning additional business could be worth an added 2% for either Cardinal or AmerisourceBergen earnings, although this is a lower-margin business with an earnings impact that will likely decline over time as more lower-cost generic drugs are approved, Gill said.

AmerisourceBergen disclosed that Express Scripts was seeking contract proposals in an earnings release Thursday. The company had a slight fiscal second-quarter earnings decline amid severance and acquisition costs, but met Wall Street expectations. The company also backed its full-year guidance.

Still, uncertainty about the Medco business weighed on shares, which declined 2.3% to close at $36.97.

AmerisourceBergen said its contract with Medco could end at the end of September this year, rather than running through March next year as originally planned.

"Express Scripts has issued an RFP for the combined business, and anticipates that the new contract or contracts will begin on October 1, 2012," AmerisourceBergen said. "We will participate fully in the competitive RFP process, and it is our intent to pursue the opportunity to retain or grow the business under a new contract."

Chief Executive Steven Collis said AmerisourceBergen "demonstrated flexibility" by agreeing to amend the current contract and end it early, so that Express Scripts can make distribution decisions for the full business. Hopefully that "put us in a good position throughout the contracting process," he said.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

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