Cardinal Health shares dropped more than 10% this week after Walgreen announced it wouldn't renew its contract with the drug distributor. The nonrenewal will slice into Cardinal's revenues, but bad news could get worse if CVS Caremark follows suit.
Walgreen was Cardinal's second largest customer, accounting for 21% of fiscal 2012 revenues. The retail chain left to buy a stake in AmerisourceBergen -- the same competitor that gained Express Scripts last summer. Express Scripts had been Cardinal's third largest customer, but it decided to go elsewhere following its multibillion-dollar acquisition of Medco.
So it hasn't been a great year for Cardinal. CVS remains as the largest customer, representing 22% of revenues, but that contract expires this summer. Will CVS opt for nonrenewal? It's possible, but CVS has caught Cardinal vulnerable -- and that's a good time for bargaining.
What can Cardinal do to fight back? There's the possibility of pursuing smaller pharmacies for contracts. And the medical segment recently grew with the $2.1 billion acquisition of AssuraMed. That gave Cardinal a foot in the home medical supply market with a company that had a million patients and about $1 billion in 2012 revenues.
It's better than nothing, but doesn't seem likely to replace these big league losses.
Walgreen's existing contract doesn't expire until after the end of fiscal 2013. Right now, Cardinal's putting the 2014 forecast in line with this year's EPS range of $3.42 to $3.50. But expect revisions in the near future, particularly if CVS leaves.
Foolish final thoughts
I've backed my doubts with a CAPScall of underperform for Cardinal Health.
Cardinal claims it has plans in place to mitigate Walgreen's loss, but didn't provide any details. If CVS does leave, Cardinal shares will plummet. But even if CVS stays, the distributor will have to try to redefine itself in a lower market position.
The company's best chance is to rebid on the deserting companies once the replacement contracts expire. Express Scripts only had a three-year contract, but it'll be a decade before Walgreen's deal with AmerisourceBergen expires.
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The article Why Cardinal Health Dropped originally appeared on Fool.com.Fool contributor Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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