Cardinal Health (CAH) has renewed its partnership with leading pharmacy benefit management company Prime Therapeutics with a new three-year distribution agreement. The original agreement was signed in July 2008.
Minnesota-based Prime Therapeutics provides pharmacy benefit services to nearly 17 million members across the U.S. The entity managed over $10.2 billion in prescription drug spend in 2010.
Under the renewed pact, Cardinal Health will continue to serve as the primary pharmaceutical supply chain partner for Prime Therapeutics’ mail-service pharmacy, PrimeMail. Moreover, the company will continue to offer Prime Therapeutics additional supply chain optimization services to help boost its operational efficiency.
Cardinal continues to be one of the largest distributors of pharmaceuticals and medical supplies in the U.S., with a diversified product portfolio, which may partly insulate it from the current economic uncertainty.
The company posted better-than-expected third quarter fiscal 2011 (ended March 31) results with both revenues and adjusted earnings, beating the Zacks Consensus Estimates. Revenues from the larger Pharmaceutical segment climbed 7% year over year in the quarter, helped by notable contributions from acquisitions. Encouraged by the healthy results, the company lifted its earnings guidance for fiscal 2011.
Cardinal’s generic business demonstrates continued signs of strength. Growth in this business continues to surpass the market growth rate. Cardinal expects its generic franchise to gain further momentum in 2012.
However, the company faces tough competition across all its business segments, which may continue to pressure pricing and margins. Its major competitors in the pharmaceutical supply chain segment include McKesson Corp. (MCK) and AmerisourceBergen Corp. (ABC).
We are also concerned about the extremely low margins in the company’s bulk pharmaceutical business. However, the shift in customer mix toward the non-bulk segment of the distribution business may gradually help drive margin expansion from the depressed levels at this point in time. Our long-term Neutral recommendation on the stock is supported by a Zacks #3 Rank (Hold).
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