Extended agreement adds sourcing of generic drugs

SAN FRANCISCO and BENTONVILLE, Ark. — McKesson Corp. and Walmart have expanded their long-term pharmaceutical distribution pact, including a new sourcing agreement for generic drugs.

McKesson and Walmart said Monday that the expanded relationship is “a natural next step.” The companies will collaborate on sourcing generics for their U.S. operations, a move that they said will add scale and value for both organizations.

“McKesson and Walmart have worked together for decades, and throughout our relationship both companies have engaged in an ongoing dialogue about how we can work together to bring more efficiency and value to the health care supply chain,” McKesson U.S. Pharmaceutical president Mark Walchirk said in a statement. “Expanding our relationship to include a sourcing partnership for generics makes economic and strategic sense for both of us. By bringing together our respective scale and sourcing expertise, we will make our businesses stronger and create more value for our customers and patients.”

The companies noted that the new sourcing agreement leverages McKesson’s strength and expertise in the global pharmaceuticals sector and Walmart’s range of accessible, affordable health and wellness services.

“Walmart and McKesson have built a strong business relationship over the past 30 years by working together to help lower the cost of health care,” stated George Riedl, senior vice president and president of health and wellness at Walmart U.S. “The dynamics of health care continue to change, and we’re changing with it. It’s why we are taking our relationship with McKesson to the next level, using our combined size and scale to drive efficiencies, something that is core to our business.”

Consolidation among drug buyers and partnerships between drug wholesalers and retailers, such as the McKesson-Walmart arrangement, have heightened price pressure for manufacturers, according to Deutsche Bank Securities analyst Gregg Gilbert.

“Drug wholesaler McKesson and retailer Walmart announced a sourcing agreement for generics, in which the companies will use their combined size and scale to drive efficiencies in generic sourcing for their respective U.S. operations,” Gilbert observed in a research note. “While we do not yet have specifics on the deal, we note that this development could put a bit more pressure on pricing in the U.S .generics market to the extent that it makes Walmart a more efficient buyer of generics.” He noted that Walmart represents an estimated 6% to 7% of U.S. retail prescription market share.

For McKesson’s 2016 fiscal year ended March 31, CVS Health was the company’s largest customer, accounting for about 20.3% of total consolidated revenue. McKesson’s 10 largest customers — which include such chains as Rite Aid and Walmart, along with group purchasing organizations — represented approximately 52.4% of its total consolidated sales. Earlier this year, McKesson reported that in December it signed a new agreement with CVS to be the distribution partner for Target pharmacies, which CVS had recently acquired.

McKesson’s expanded agreement with Walmart reflects the closer relationships that drug distributors and pharmacy chains have formed in recent years amid changes in pharmaceutical pricing and procurement.

In February 2014, McKesson and Rite Aid Corp. unveiled an expanded distribution pact that extended their existing agreement and included both generic and branded drugs. The new agreement runs to March 2019.

Months later, in July 2014, McKesson announced a three-year extension to its distribution pact with CVS Caremark Corp. (now CVS Health), lengthening the time frame of their agreement to June 2019.

Also in July 2014, the Red Oak Sourcing LLC generic drug joint venture of CVS and Cardinal Health Inc. went operational. Foxborough, Mass.-based Red Oak is the nation’s largest generics sourcing entity. CVS and Cardinal unveiled the joint venture in December. Plans call for the 50/50 venture to source and negotiate generic supply contracts with generics manufacturers for both Cardinal and CVS Caremark. The entity is slated to have an initial term of 10 years. At the time, CVS and Cardinal also announced a three-year extension, through June 2019, of their existing pharmaceutical distribution agreement.

And in September 2015, McKesson announced that it signed a five-year distribution pact with food and drug retailer Albertsons for the sourcing and distribution of branded and generic drugs.

More recently, Walgreens Boots Alliance (WBA) Inc. bolstered its long-term partnership with AmerisourceBergen Corp. Earlier this month, AmerisourceBergen said it extended its relationship with WBA for another three years, lengthening its drug distribution contract with WBA and relationship with Walgreens Boots Alliance Development (WBAD) to 2026. AmerisourceBergen and then-merger partners Walgreen Co. and Alliance Boots had announced a 10-year agreement in March 2013. As part of that partnership, WBA this past March enlarged its equity stake in AmerisourceBergen and now holds nearly 15% of the drug distributor’s outstanding equity.

*Editor’s Note: Analyst comment added to article.