A Bitter Pill for Amerisource

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The year started on a sour note for the major drug distributors. AmerisourceBergen (NYSE: ABC) took the worst of it this past week, with a major contract loss that shook up investors across the industry today as questions and speculation buzzed.

The drama unfolded when AmerisourceBergen announced what many viewed as a surprise loss of a $3 billion federal contract to rival McKesson (NYSE: MCK). Amerisource plummeted as management was forced to issue a significant downward revision to its fiscal 2004 earnings guidance.

Under the contract, Amerisource was the primary pharmaceutical provider for the Department of Veteran Affairs. The deal was important enough to the company's revenues that any possibility of its loss was cited as a risk factor in its latest 10-K -- for five years. The plum contract is now McKesson's for the next two years, with the possibility of two three-year extensions.

On Friday, shares of McKesson and Cardinal Health (NYSE: CAH) both dropped, as investors absorbed the news, and a variety of concerns emerged about the industry at large, including a possible price war that would threaten profit margins. Forbes gave investors further cause to question McKesson's prospects, pointing out costs associated with infrastructure and working capital requirements related to the new contract.

Amerisource shares traded down nearly 5% at $53.45 Friday morning, while McKesson dropped almost 3% to $31.24, and Cardinal Health slid 2.4% to $59.70.

Clearly, Amerisource faces a major challenge to replace the lost revenue from the contract. Whether the sell-off elsewhere in the sector overstated the challenges facing the industry remains to be seen.

Are investors going to get caught in the crossfire of an industry price war? Or are investors overreacting? Discuss these and more issues with other Fools on the Healthcare discussion board.

Alyce Lomax welcomes your feedback at alomax@fool.com.