Baird: What Rite Aid's Renewed Deal With Distributor McKesson Means For Both Companies

Retail pharmacy chain Rite Aid Corporation (NYSE: RAD) announced a renewal of its contract Wednesday with pharmaceutical distributor McKesson Corporation (NYSE: MCK) through 2029.

What Happened

McKesson will continue sourcing and offering Rite Aid delivery of branded and generic drugs with the deal. 

Rite Aid may have benefited from revised terms, Baird's Eric Coldwell said in a note.

Rite Aid cited new "competitive drug pricing"  in its press release, and management said the deal represents an "enhancement of value to us" in a conference call, the analyst said. 

Why It's Important

McKesson's contract extension win wasn't guaranteed, as Rite Aid had the option to switch to a rival, Coldwell said. Rite Aid had noted poor performance partly driven by generics purchasing, and this raised the possibility of AmerisourceBergen Corp. (NYSE: ABC) displacing McKesson, according to Baird. 

Some AmerisourceBergen investors "might be slightly disappointed" McKesson won the contract renewal, Coldwell said. 

What's Next

Rite Aid likely represents a low-single digit percentage of McKesson's earnings, so any pricing revision is unlikely to be material to its fiscal 2019 or 2020 earnings, the analyst said. McKesson told Baird that its prior fiscal 2019 guidance assumed contract renewals, so there are no changes to McKesson's outlook at this time, he said. 

Baird continues to hold Neutral ratings on both McKesson and AmerisourceBergen and does not have research coverage of Rite Aid's stock.

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