Barclays on U.S. Health Care Distribution & Technology: VA Contract Announcement Could Be Early January; No Change in Our Expectations
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21 Buy, 9 Hold, 0 Sell
Rating Trend:
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Today's Overall Ratings:
Up: 8 | Down: 5 | New: 25
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Barclays on U.S. Health Care Distribution & Technology: VA Contract Announcement Could Be Early January; No Change in Our Expectations
Barclays analyst, Lawrence C. Marsh, said, "While we could be getting an announcement any day, our recent Department of Veterans Affairs National Acquisition Center (NAC) interaction suggests that an early January award for its much-awaited pharmaceutical prime vendor contract may now be somewhat more likely. Recall that no specific date has been set for the announcement, though it must be made "at least four months" in advance of the new contract, May 10, 2012. The last award, the eight-year contract in 2003, memorably came the afternoon of December 31, while the 1998 five-year award came in early January of 1999. The VA is the largest specific government contract in the pharmaceutical wholesaling industry, representing some $8.5 billion of "gross" drug spend or $4.3 billion net annually."
"We have not changed our expectations: As much as one normally assumes a current incumbent advantage (in this case McKesson), it is clear to us that assumption would be presumptuous in this case. However, we point to the McKesson (NYSE: MCK) CDC experience, the pre-term pricing take-downs already imbedded in the VA business, its pricing understanding here, and notable long-term renewal success as data points of its contracting acumen. With that, we would assign roughly 60% odds to MCK keeping all or a large majority; 25% odds of AmerisourceBergen (NYSE: ABC) regaining, and 15% odds of success by Cardinal Health in this bid."
"Given the mechanics of cash discounts and rebates from gross revenues that suggest there could be 775+ basis points of buy-side "spread" on net revenues, we could see a winning bid at up to WAC less 725 basis points for the CMOP in the later option years of this renewal. This compares to the current wholesaler acquisition cost (WAC) less 5.15% for MCK in this contract year. We thus continue to believe the renewed bid could generate some $0.15-$.20 for MCK in a new bid for FY13 (which assumes a $0.20 reduction from its FY12 benefit with lower renewal pricing), $0.17 for ABC, and $0.13 for Cardinal Health (NYSE: CAH). These estimates are based on ultimate "pricing" to be in the general range of a blended cost "minus 675 basis points".
Barclays analyst, Lawrence C. Marsh, said, "While we could be getting an announcement any day, our recent Department of Veterans Affairs National Acquisition Center (NAC) interaction suggests that an early January award for its much-awaited pharmaceutical prime vendor contract may now be somewhat more likely. Recall that no specific date has been set for the announcement, though it must be made "at least four months" in advance of the new contract, May 10, 2012. The last award, the eight-year contract in 2003, memorably came the afternoon of December 31, while the 1998 five-year award came in early January of 1999. The VA is the largest specific government contract in the pharmaceutical wholesaling industry, representing some $8.5 billion of "gross" drug spend or $4.3 billion net annually."
"We have not changed our expectations: As much as one normally assumes a current incumbent advantage (in this case McKesson), it is clear to us that assumption would be presumptuous in this case. However, we point to the McKesson (NYSE: MCK) CDC experience, the pre-term pricing take-downs already imbedded in the VA business, its pricing understanding here, and notable long-term renewal success as data points of its contracting acumen. With that, we would assign roughly 60% odds to MCK keeping all or a large majority; 25% odds of AmerisourceBergen (NYSE: ABC) regaining, and 15% odds of success by Cardinal Health in this bid."
"Given the mechanics of cash discounts and rebates from gross revenues that suggest there could be 775+ basis points of buy-side "spread" on net revenues, we could see a winning bid at up to WAC less 725 basis points for the CMOP in the later option years of this renewal. This compares to the current wholesaler acquisition cost (WAC) less 5.15% for MCK in this contract year. We thus continue to believe the renewed bid could generate some $0.15-$.20 for MCK in a new bid for FY13 (which assumes a $0.20 reduction from its FY12 benefit with lower renewal pricing), $0.17 for ABC, and $0.13 for Cardinal Health (NYSE: CAH). These estimates are based on ultimate "pricing" to be in the general range of a blended cost "minus 675 basis points".
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