Wholesaler Impact of a Longs Drug Deal

Implications: Walgreens (NYSE:WAG) and CVS Caremark (NYSE:CVS) are now in a bidding war for Longs Drug Stores (NYSE:LDG). No matter which company wins, the long-term outcome will probably be negative for AmerisourceBergen (NYSE:ABC), which is Longs’ primary wholesale supplier.  The sale of Longs Drug Stores will be one more step in the ongoing consolidation of the pharmacy supply chain.

Analysis: Right now, Longs buys more than 90 % of its pharmaceuticals from AmerisourceBergen (ABC) under a long-term contract, which includes a minimum purchase requirement over the contract term. (Source: Long’s most recent 10-K filing.)

Based on the public data, I estimate that Long’s represents less than 3% of ABC’s total drug distribution revenues.

The eventual buyer will presumably want to consolidate purchasing volumes for brand drugs with its primary wholesaler while shifting generic purchases to direct relationships with manufacturers.

Here’s a quick rundown on current wholesaler relationships for brand supply at CVS and WAG:

* CVS Caremark is now the single largest customer of both McKesson (NYSE:MCK) (primarily Caremark/Pharmacare mail) and Cardinal Health (NYSE:CAH) (primarily CVS retail). CVS Caremark will decide its brand purchasing strategy no later than mid-2009.

* Walgreens is the second largest customer of Cardinal Health. The companies signed a three year contract renewal in January 2008 that will shift an estimated $2 billion in business from ABC to CAH.