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Lose-Lose in McKesson's VA Contract

An analyst says poaching the pact from AmerisourceBergen will result in margin pressure.




squawks about poaching a big Veterans Administration contract from



, a Wall Street analyst said Friday the episode is bad for both pharmacy-benefit providers.

Bear Stearns downgraded both to peer perform in a pair of reports issued Friday. Analyst Raymond Falci said the VA's move would cut profits for Amerisource, but McKesson's new contract was a low-margin victory that will do little to help the San Francisco health care supply manager.

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While McKesson's bid was probably 20% below competitors Amerisource and

Cardinal Health


, the picture for drug distribution has changed in the five years since the last VA contract. McKesson hasn't issued guidance following the new contract, but Falci says the company may have tilted too far toward cheap in "the continual balance between appropriate and aggressive pricing." He said other long-term contracts that account for about 7% of McKesson's revenue will also be less profitable than originally planned.

He set a year-end target of $36 for the stock, which traded at a day low of $30.70, down from its opening price of $31.30.

But the loss of the VA revenue will still hurt Amerisource, the Bear Stearns report said. The contract accounts for $3 billion, about 6% of its revenue. Amerisource lowered its earnings guidance to $4.10 to $4.20 a share from previous guidance of $4.50 to $4.60. The contract, which goes over to McKesson on April 1, represents half of Amerisource's fiscal year. Falci forecast a $156 million drop in pretax profits and set a year-end price target of $62.

The stock recently traded at a day low of $52.85 from its opening price of $53.75.

Bear maintained an outperform rating on Cardinal, saying it has avoided the aggressive pricing polices of its competitors, and set a $75 target for its year-end price. It has no investment banking relationship with any of the companies.