Today's earnings announcement by Walgreen Corp (WAG) was accompanied by an additional release that sounded an ominous note for Cardinal Health (NYSE:CAH) shareholders.
In addition to providing a positive earnings surprise, Walgreen announced that it had taken an ownership stake in Cardinal Health competitor AmerisourceBergen (NYSE:ABC). The exact extent of Walgreen's position in Amerisource will not be immediately known, though Walgreen can purchase as much as 7% of AmerisourceBergen's open equity and has equity warrants for an additional 16% of Amerisource shares.
Cardinal Health also provided a release indicating that Walgreen's had indicated that it will not renew its agreement with Cardinal that is scheduled to end on August 31, 2013.
The news is exceptionally disappointing given Cardinal's highly concentrated revenue base where the top 5 customers accounted for 59% of fiscal 2011 revenues, up from 57% in fiscal 2010 (the data was not updated in the fiscal 2012 annual report). In fiscal 2012 Walgreen, accounted for over $22.5 billion of Cardinal's $107.6 billion revenues, or approximately 22% while CVSCaremark (NYSE:CVS) contributed an additional $23.7 billion, as indicated in the company's fiscal 2012 10k.
News of Walgreen's contract lapse follows an announcement in September 2012 that Express Scripts, Inc. (NASDAQ:ESRX) elected to not renew its contract with Cardinal Health following its merger to Medco Health Solutions, Inc. At the time of the announcement, Express Scripts had comprised approximately $9 billion of Cardinal revenues for the partial year. The resulting impact was witnessed in Cardinal's fiscal Q2 2013 results that fell by approximately $2 billion.
In addition to the remaining CVS agreement, Cardinal has ongoing relationships with Novation, LLC and Premier Purchasing Partners, L.P.