Cardinal Health (NYSE:CAH) may have turned a corner in bringing its drug distribution business into a new era.
The health-care services outfit announced Wednesday that it signed a multiyear agreement with Eli Lilly (NYSE:LLY) to distribute the pharmaceutical company's medicines to hospitals and pharmacies. Specific terms of the contract were not disclosed, but the deal does appear to be structured as a fee-for-service arrangement.
Drug distributors such as Cardinal, McKesson (NYSE:MCK), and AmerisourceBergen (NYSE:ABC) have been in the doldrums lately as the business model for their industry changes. Cardinal has been trying to push its customers into a system in which it is paid a fee for distribution services, but some clients have held onto the old model, in which Cardinal makes a profit by relying on pharmaceutical companies to hike drug prices.
The pharmaceutical industry is notoriously cagey about changing business practices, in part because of the regulatory requirements they face in many areas. However, Lilly's decision likely will help accelerate other firms to move toward the new fee-for-service model. Indeed, Cardinal is already working hard to hammer out details for similar fee-for-service deals with other major pharmaceutical companies, according to Reuters.
One notable aspect of the contract with Eli Lilly, though, is that the agreement expands on existing relationships between the two firms. Cardinal noted in its press release that besides distribution, its dealings with Lilly include drug development and manufacturing. Cardinal's ability to offer this bundle of services to pharma customers could give it a competitive advantage over pure play rivals. In addition, by offering a suite of services to clients, Cardinal may be able to offset any potential thinning of margins in its distribution business.
For more on Cardinal, check out these takes:
Be sure to also check out our Cardinal Health discussion board.
Fool contributor Brian Gorman is a freelance writer living in Chicago. He does not own shares of any companies mentioned here.
