Cardinal Health (CAH) Jumps on Joint Venture with CVS Caremark
Shares of Cardinal Health (CAH) closed up $1.95 per share, at $66.22, up 3.03% on Tuesday. The increase came on the announcement of a joint venture with CVS Caremark (CVS) to form a generic drug sourcing unit. CVS was also up on the news, rising $1.27 to 68.00, or 1.90%.
Today’s joint venture announcement represents the formation of the largest generic sourcing entity in the US, which is also the world’s largest prescription drug market. The agreement represents a 50-50 joint venture between the two companies. The joint venture will be US-based and is expected to become operational by July 1, 2014. The initial term will be 10 years.
The agreement specifies quarterly payments of $25 million from each participating company over the life the agreement. These payments have an estimated after-tax present value of $435 million.
Neither Cardinal Health nor CVS Caremark have an obligation to contribute either physical assets or substantial funds to the initial capitalization of the new venture. The agreement is subject only to the completion of final documentation and customary closing conditions.
In a separate announcement, the two healthcare clients also agreed to a three-year extension of existing pharmaceutical distribution agreements through June, 2019. The previous agreements with CVS represent $24 billion of revenue, or about 22% of Cardinal Health’s total revenues of more than $107 billion.
The creation of the joint venture with CVS, as well as the extension of current agreements, is believed to at least partially offset the loss of similar agreements with Walgreen Co. (WAG), and Express Scripts, Inc. (ESRX), both of which were terminated earlier this year. Walgreen had been Cardinal Health’s second largest source of revenue, at 21% of total sales. Expressed Scripts previously contributed $9 billion in total revenue, and was the company’s third largest customer.
Cardinal Health currently trades at 15.1 times forward P/E, and is at the upper end of it‘s 52 week range of 40.49 - 67.75.
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