McKesson (NYSE:MCK) has won a U.S. Department of Veterans Affairs drug distribution contract that could be worth nearly $32 billion over eight years, beating out its top rivals Cardinal Health (NYSE:CAH) and AmerisourceBergen (NYSE:ABC).
Winning such a potentially huge contract made McKesson popular on Wall Street and sent shares of the San Francisco-based company up more than 4 percent in pre-market trading Thursday morning.
The contract calls for McKesson to supply pharmaceuticals to 700 VA locations, including mail-order pharmacies and 270 medical centers. The initial two-year contract comes with two three-year options, which means it could run for a total of eight years. It begins next month, according to the VA.
McKesson also previously held the same VA drug distribution contract, which began in 2004.
“Our track record for driving substantial financial efficiencies while exceeding service levels is why government and commercial customers continue to choose McKesson,” said McKesson CEO John Hammergren.
The VA had originally hoped to award the drug distribution contract in January, but it was delayed after two companies challenged the agency’s decision to exclude small businesses from the contract, Bloomberg reported.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Discounts McKesson will provide to the federal government are expected to save the VA about $3.4 billion over the life of the contract.
Writing at Drug Channels, Adam Fein said the “quite astounding” discounts — in some cases up to 8.65 percent — show how badly McKesson wanted the contract.
Fein explains the principles behind such so-called “cost-minus pricing” and how a drug wholesaler like McKesson is able to make money under this type of arrangement, even with steep discounts:
Despite what you may have heard, cost-minus pricing does not mean that a wholesaler sells the product below its own acquisition cost. Instead, the wholesaler is selling a product for less than the manufacturer’s list price (or a different measure of cost). On average, gross margin percentages remain positive for wholesale sales of brand-name drugs to all customer groups and product types.
