PharMerica Rings Alarm Bells Over Cardinal Health Contract

Leaders and executives spill the beans by pointing out that the contract signed with Cardinal will cut profits.

Leaders and executives of PharMerica, Louisville-based institutional, specialty home infusion, hospital, and oncology pharmacy services provider, have spoken out against the wholesale drug store distribution agreement signed with Cardinal Health Inc. (NYSE:CAH) a few months ago, arguing that it would cut into the company’s margins.

Executive vice president and CFO, Dave Froesel, made that statement during an earnings guidance call and announced that the beginning of the second quarter heralded the start of the operation of using Cardinal Health for the purpose of drug and health care sourcing and distribution. However, the agreement which was signed a few months ago, has come under fire from many, including Mr. Froesel, who stated that the cost of distribution of drugs under Cardinal will be more than with the previous wholesale pharmaceutical supplier, AmerisourceBergen. That, according to Foresel, is going to affect the company’s margins and bottom-line quite badly.

The reason for the termination of PharMerica Corp’s previous working relationship with AmerisourceBergen arises from a legal dispute. The company claims that AmerisourceBergen owes it more than $8 million because of rebate provision that the two companies agreed to in a previous contract. The contract states that it can buy most of its generic drugs from AmerisourceBergen, though the contract included a phrase that allowed it to purchase a portion of other drugs from other sources if it can get a better price. That is where the disturbance all began.

Therefore, the center of dispute lies on the fact that the pricing is based on the wholesale level, but after market changes, it has been dubbed as non-viable. AmerisourceBergen claims that PharMerica inflated its rebate prices and accuses it of breaching the contract by not paying it. AmerisourceBergen hits back, arguing that the contract gives room for both parties to renegotiate in the event of unexpected market changes.

Froesel highlighted that once PharMerica announced its intention to go ahead with the deal with Cardinal, AmerisourceBergen decided to withhold its rebate payments. It is not known if the company will try to pursue the case or whether it feels that the relationship has deteriorated enough to not think about it.

Last week, PharMerica released its earnings result, which saw its revenue rose 13% to $511 million, whereas its net income grew two-fold to less than $10 million. Cardinal Health Inc. stock price ended the day at $86.83, a gain of more than 0.80%, suggesting that the deal has support from investors despite PharMerica leaders’ objection.