By Jon Kamp
Drug-wholesaler McKesson Corp. (MCK) has renewed its supply deal with pharmacy chain Rite Aid Corp. (RAD), its second-largest customer, in a new agreement that is set to stretch into 2016.
The renewal came earlier than expected, according to analysts, and was disclosed in a regulatory filing from Rite Aid late Wednesday. The agreement locks up a major account for McKesson at a time Wall Street is watching closely to see if pharmacy operators stay put or change distributors as big contracts expire.
The new supply agreement between Rite Aid and McKesson extends their relationship by three years to March 31, 2016. Specific terms weren't disclosed, but the but the new agreement does amend "certain pricing and related terms," Rite Aid said in its filing.
"We note that contract renewals at lower margins are the norm in the drug distribution industry and as such do not find this surprising nor do we believe it will be particularly impactful to McKesson's earnings," JPMorgan analyst Lisa Gill said in a research note.
McKesson is the largest drug wholesaler by revenue, and Rite Aid is the firm's second-largest customer after CVS Caremark Corp. (CVS). According to Robert W. Baird analyst Eric Coldwell, Rite Aid represented about 12% of McKesson's sales in the company's 2012 fiscal year, or about $12.3 billion. This revenue tally has come down a bit in recent years due to the mix of generic drugs and financial issues at Rite Aid, the analyst said in a note to investors.
Meantime, Rite Aid's earnings contribution to McKesson is more muted--Mr. Coldwell estimated Rite Aid is a mid single-digit contributor--but there is "symbolic importance of keeping a flagship account, as well as maintaining revenue growth optics," the analyst said.
Keeping Rite Aid also sends a positive signal as other big pharmacy contracts end. Business CVS Caremark divides between McKesson and Cardinal Health Inc. (CAH) comes up for renewal next year, and Cardinal Health is also facing an expiring Walgreen Co. (WAG) contract next year.
The Rite Aid announcement "reinforces our view that Cardinal and McKesson will likely retain their respective pieces of the CVS business and Cardinal will likely retain all of the Walgreens business," analyst Gill said.
"The level of systems integration, balance sheet support and secondary generic supply source are all key factors that promote long-term relationships between large retail chains and drug distributors," she added.
McKesson shares were recently inactive in premarket trade. They have risen about 12% this year.
Write to Jon Kamp at firstname.lastname@example.org
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