Cardinal Health has lost a roughly $22 billion-a-year contract to supply Walgreen Co., a blow that industry analysts say could have a serious impact on the company's future. Cardinal, based in Dublin, is one of the largest private employers in central Ohio, with 4,150 workers. Cardinal CEO George Barrett declined to say whether job cuts would be needed.
Cardinal Health has lost a roughly $22 billion-a-year contract to supply Walgreen Co., a blow that industry analysts say could have a serious impact on the company’s future.
It also heightens Cardinal’s need to retain a pharmaceutical-distribution contract with CVS Caremark of about the same amount, set to expire in June.
Cardinal, based in Dublin, is one of the largest private employers in central Ohio, with 4,150 workers. Cardinal CEO George Barrett declined to say whether job cuts would be needed to compensate for the 21 percent loss in revenue that the Walgreen contract represented.
“(Walgreen) is a very significant loss for them,” said Adam Fein, president of Pembroke Consulting. “CVS has not yet been re-signed ... and this news puts CVS in a very favorable position to negotiate with Cardinal.”
AmerisourceBergen Corp. won a 10-year contract to supply more than 8,000 Walgreens pharmacies. The agreement also includes Alliance Boots, a European health-and-beauty chain, and is valued at $28 billion annually.
As part of the agreement, Walgreen and Alliance Boots can buy up to 23 percent of AmerisourceBergen stock, a move designed to let the pharmacy chains better negotiate prices with drug manufacturers. Walgreen owns a stake in Alliance Boots.
“We have a game plan, and we’ll carry on,” said Barrett, adding that the company expects to win the CVS contract at a fair price, as well as continue the diversification of Cardinal.
“CVS is a terrific partner and has been for decades, and we’d love to continue to work with them,” he said. Even so, Barrett said he doesn’t feel extra pressure to retain that contract.
“I don’t feel that way; every relationship stands on its own,” Barrett said.
Fein thinks there will be job reductions.
“ Cardinal will need to restructure its business to account for the sharply reduced revenues,” he said.
Jacob Bostwick of Fitch ratings said it would “not be good” if Cardinal doesn’t retain the CVS contract.
“From a credit perspective, it’s very important to win CVS at only a slightly lower profit margin to retain their current rating,” he said, adding that Cardinal and rival McKesson currently supply CVS.
Cardinal has long held the top spot among Ohio companies on the Fortune 500 list, placing 21st on the magazine’s 2012 list. However, the loss of the Walgreen revenue could drop Cardinal five or so spots down the list, behind Cincinnati-based Kroger, which was No. 23 with $90.4 billion in revenue, and possibly Cincinnati-based Procter & Gamble, No. 27 with $82.6 billion in revenue.
According to Cardinal, the CVS contract accounts for 22 percent of its revenue, and the Walgreen contract 21 percent. Cardinal’s revenue for the year that ended June 30 was $107.6 billion.
Cardinal also lost to AmerisourceBergen in August its long-time contract to supply bulk pharmaceuticals to Express Scripts. The contract with Express Scripts was for $9 billion annually.
“We certainly have worked very hard in recent years to bring additional balance to the business model,” Barrett said. He noted Cardinal’s enhanced efforts in the specialty- and ambulatory-care markets; recent acquisition of home health-care provider AssuraMed for $2.1 billion; and an increased footprint in China through the acquisition of several drug-distribution companies.
Barrett added that while the Walgreen contract represents 21 percent of Cardinal’s revenue, it is a much smaller percentage of its profits, because of the low margins for the sale of bulk drugs. He would not give specific figures.
“We estimate the loss will be 20 (cents) to 25 cents in earnings per share,” said Ross Muken, an analyst with ISI Group.
In a statement, Cardinal said the loss of the Walgreen deal won’t affect its fiscal year 2013 earnings. The year ends June 30, and officials expect earnings of $3.42 to $3.50 per share.
Muken said the loss of the contract might hasten Cardinal’s diversification.
He thinks the company will go after the smaller, independent pharmacies and build up the medical segment of its business. This segment accounted for $9.6 billion in revenue in 2012, while pharmaceuticals brought in $97.9 billion.
“It will cause some near-term financial headwinds,” Muken said of the loss of the Walgreen contract. “But it doesn’t impact their long-term competitiveness and may allow them to change the direction of the company.”
Fein believes Cardinal faces more-serious issues.
“Cardinal’s board is going to have to do some real soul-searching,” he said. “AmerisourceBergen now becomes the biggest player in (the pharmaceutical-distribution business), ahead of McKesson, and now Cardinal is third."