Commentary

Walgreen's Rx For Revenue Loss: Buying Binge

Walgreen will pay $438 million for a 144 –store regional drug store chain in the mid-South that operates under the USA Drug, Super D and May's banner. The stores, concentrated in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee, are part of an acquisition “spree,” as several reports put it, aimed to rejuvenate sales figures at the nation’s largest drug store chain. The company also announced yesterday that same-store sales from June 2011 to 2012 were down a higher-than-analysts-expected 10.7%, with pharmacy revenue slipping 15%. 

Last month Walgreen agreed to spend $6.7 billion in cash and stock for a 45% stake in the U.K. retailer Alliance Boots, with an option to buy the rest of the company down the road. The latest deal is primarily with privately owned, Little Rock, Ark.-based Stephen L. LaFrance Holdings Inc. but also includes the purchase of assets or stock of affiliated companies or stores that are not owned by the holding company. It posted $825 million in sales in 2011.

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Walgreen paid $429 million for Drugstore.com in 2011 and acquired the New York pharmacy chain Duane Reade for $1.1 billion in 2010.

Walgreen is still reeling from its split with pharmacy benefits manager (PBM) Express Scripts, with which it failed to reach an agreement to continue past the end of last year. Total June sales were about $5.6 billion, a decrease of 6.8%, from 2011. Pharmacy sales accounted for 62.9% of total sales for the month, according toDrug Store News’ Allison Cerra. Prescriptions filled for Express Scripts amounted to 12.6% of Walgreen’s business in June 2011, according to the company.

The acquisition may give Walgreen “some additional leverage” in dealing with Express Scripts, Gabelli & Co. analyst Jeff Jonas tellsBloomberg Businessweek’s Tom Murphy, noting that Express Scripts may feel more pressure to include Walgreens in its network if the retailer establishes a dominant position in a particular market. 

In a story on Nasdaq.com this morning, Jon Kamp writes that “the strained relationship” between Express Scripts and Walgreen “has heightened interest in networks that limit the number of drugstores available to pharmacy-benefit customers, but can result in savings for their employers and health plans.” These so-called narrow networks are "something that's getting a lot more focus and attention than in prior years," CVS Caremark CEO Larry Merlo tells Kamp. 

Walgreen is already facing added pressure because Express Scripts further consolidated the PBM business by purchasing Medco health Solutions last year, Kamp points out. 

"This acquisition expands our business in an important region of the country," according to Walgreen CEO Greg Wasson, in a statement announcing the LaFrance Holdings deal. The company points to its " strong prescription businesses,” saying  “we intend to grow them further by adding products and services."

The question is whether Walgreen’s aspirations exceed its ability to manage them, according to one New York-based independent analyst. “They’re trying to really, really dominate the U.S. pharmaceutical scene,” Brian Sozzi tells Bloomberg’s James Callan and Leslie Patton. “It’s just a lot of stuff going on with this company where I don’t know if they have the personnel to integrate all these businesses at once.” 

Sozzi also frets about the debt load. “They’re levering up the balance sheet and that’s another big concern,” he says. 

Stephen LaFrance, who had planned to retire in 60 days, started as a pharmacist with a single USA Drug store in Pine Bluff, Ark., Tim Trainor reports for CoStar Gorup. He expanded from 15 stores in 1997 by buying the much larger Super D, a chain with about 100 stores.

"I opened up on February 26, 1968. I was 26 years old and I made $26 the first day and I thought this is some kind of bad omen," LaFrance tells KATV. "The success that we've had is very simple; it's caring for the customer."

The acquired drugstores will operate under their current brand names in the short term, Walgreen says, “and decisions will be made over time regarding the best, most effective way to harmonize Walgreens and the acquired brands.”

Walgreen had 2011 sales of $70 billion. One helpful “factoid” from Peter Lattman’s coverage of the deal in the New York Times: “The company is Walgreen; the stores are called Walgreens.” Not quite as aggravating to copy editors as the fine points of Walmart vs. Wal-Mart Stores, Inc., but the record is now straight as we take the weekend cure.

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