Fitch: Publix, AmerisourceBergen Deal Underscores Power of Scale

CHICAGO & NEW YORK--(BUSINESS WIRE)-- The largest drug sourcing entities and major U.S. drug distributors continue to prove the benefits of their unmatched scale as they win increasingly comprehensive distribution contracts with pharmacy chains in the U.S., according to Fitch Ratings. This trend is highlighted by Thursday's announced agreement between AmerisourceBergen (ABC) and Publix.

The ABC-Publix deal is just one of many new contracts announced in recent years expanding the relationship between U.S. drug distributors and their downstream customers. The recent spate of expanded distribution contracts began with AmerisourceBergen's long-term agreement with Walgreens in 2013, followed by McKesson with Rite Aid and Omnicare and Cardinal Health with Fred's in 2014. Expanded contracts in 2015 included McKesson with Albertson's and Cardinal with PharMerica and UnitedHealth's OptumRx.

The new long-term drug and healthcare products distribution agreement between ABC and Publix includes direct delivery of branded, generic, and over-the-counter (OTC) health and drug products by ABC to all Publix pharmacies, warehouses, and central fill facilities. The agreement also provides Publix with access to ABC's proprietary inventory management solution, which utilizes radio frequency identification (RFID) enabled technology to facilitate the dispensing of specialty medications in Publix' community pharmacies.

The distribution of OTC products is a unique facet of the ABC-Publix agreement. While most of the recently announced expanded distribution contracts have added the sourcing and distribution of generic drug products, Fitch is unaware of any other agreements that include a material volume of OTC health and beauty products. Still, this evolution is one that Fitch has expected since the beginning of ABC's relationship with Walgreens, given the associated scale and emphasis of Walgreens and its Alliance Boots operations in Europe. We anticipate that the distribution of OTC health and beauty products, and perhaps even certain products commonly referred to as front-of-store, could be the next areas of evolution for U.S. healthcare distributors and pharmacies.

Since 2013, four entities have amassed unmatched scale with regard to the global purchasing of generic drugs. These entities include Walgreens Boots Alliance GmbH (Walgreens Boots Alliance and AmerisourceBergen), Red Oak Sourcing LLC (CVS Health and Cardinal Health), McKesson Corp., and Econdisc (Express Scripts and Kroger). Superior scale allows purchasers to demand more favorable pricing, including certain discounts and/or rebates, and often improved payment terms from generic drug manufacturers. These features are making U.S. drug distributors increasingly valuable partners for smaller pharmacies and healthcare providers looking to cut costs.

U.S. drug distributors, in their own right, have been illustrating the value they offer to the drug channel as a whole for many years. Since consolidating into three players controlling more than 90% of the U.S. market and entering into fee-for-service contracts with virtually all branded drug manufacturers, these massive healthcare logistics companies have proven their stability and the cost savings they provide to both upstream and downstream customers, consolidating enormous amounts of inventory and accounts receivable management services among thousands of drugmakers, pharmacies, and healthcare providers. This value, though earning only very slim profit margins, is not likely to erode for the foreseeable future.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160204006304/en/

Fitch Ratings
Jacob Bostwick, CPA
Director
Corporate Finance, Healthcare
+1 312-368-3169
Fitch Ratings
70 W. Madison Street
Chicago, IL
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
33 Whitehall Street
New York, NY
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Perseus Updates Mineral Resources and Ore Reserve Estimates
• As DEA Rules Marijuana's Medical Status, Cannabis Giants Face RICO Claims-and Insurers Head for the Exits
• Padilla Announces Health Leadership Promotions as Agency Accelerates Growth in Sector