Commentary

Consolidation Continues With Walgreens Deal For Rite Aid

Walgreens Boots Alliance, the international pharmacy chain still based in Deerfield, Ill., agreed yesterday to shell out about $17.2 billion to acquire Rite Aid, America's third-largest drugstore retailer based in Camp Hill, Pa. Both companies have a large presence in states such as California, Michigan and New York and analysts expect regulators at the Federal Trade Commission to force some divestitures in those states.

“The deal would combine the second and third largest drug-store operators and, if it gets regulatory approval, intensify the already fierce competition between Walgreens and CVS Health,” writes Nathan Bomey for USA Today. “CVS has 58% market share in the pharmacy and drug store business, Walgreens controls 31% and Rite Aid has 10%, according to research firm IBISWorld. The industry has $263 billion in annual revenue and $10.3 billion in profit.”

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The big have been getting bigger “as providers look to beef up and bargain for lower prices from drugmakers,” point out Reuters’ Ransdell Pierson, Ramkumar Iyer and Siddharth Cavale. “In part, that is because President Barack Obama’s national healthcare reform law seeks to limit spending by cutting payments in government insurance programs. Large companies that provide health benefits have also tightened their spending.”

“Walgreens is doubling down on retail pharmacy,” Pembroke Consulting president Adam Fein tells the Chicago Tribune’s Ameet Sachdev. “The combined company will be a heavyweight negotiator with payers and suppliers.”

Rite Aid, which has nearly 4,600 stores and $27 billion in sales, will keep its name over its portals, at least until Walgreens creates “a fully harmonized portfolio of stores and infrastructure,” as it says it intends to do over time in the release announcing the deal. Rite Aid itself purchased EnvisionRx, a pharmacy-benefits manager, in June for about $2 billion and “scooped up two of its smaller drugstore rivals, Eckerd and Brooks,” in 2006, Sarah Halzack reports for the Washington Post.

Walgreens, with about 13,200 stores worldwide (8,300 in the U.S.) and sales of $76.4 billion for the year ended Aug. 31, 2014, “has been on a buying binge,” the Tribune’s Sachdev reports, acquiring Duane Reade, Drugstore.com and USA Drug since 2010. It considered moving its headquarters overseas last year to cut taxes when it completed its acquisition of Nottingham, England-based Alliance Boots but decided against it for several reasons, probably including the public’s reaction.

CVS, with 7,870 stores and sales of $139.4 billion last year, acquired CareMark in 2007 to become the nation’s second largest pharmacy-benefit manager. In September 2014, it declared itself free of tobacco and rebranded as CVS Health. In May, CVS acquired Omnicare, the nation’s largest provider of prescription meds to those in long-term care, for $12.7 billion. In June, it bought Target’s 1,660 in-house pharmacies for $1.9 billion.

Stefano Pessina, formerly the acquisitive boss at Boots Alliance, was named Walgreens Boots Alliance permanent CEO in July. He had served as interim CEO after the retirement of Greg Wasson when the merger between Walgreens and Alliance Boots was completed in 2014.

“For Stefano Pessina, the Italian billionaire who helped take over and run Walgreens, it was always a matter of when, not if, he pulled the trigger on his next deal,” writes Paul Ziobro for the Wall Street Journal in a profile of the 74-year-old CEO with a degree in nuclear engineering. He “turned his family-owned drug distribution business into a sprawling international health care company” with more than 150 acquisitions over the years.

“‘I believe that the American market will go through a substantial wave of consolidation horizontally and vertically,’ Mr. Pessina told investors in the drugstore chain in July. ‘I have said very clearly that we want to be part of this at the right time with the right partner.’”

Now that it has found one, it will have to convince the FTC that the partnership will not unduly stifle competition. But the FTC is “likely to scrutinize the changing ways in which consumers buy pharmacy items and prescriptions,” point out Michael J. de ka Merced and Hiroko Tabuchi for the New York Times.

“I expect that the companies will argue that the competition is now broader than just the Rite Aids, Walgreens and CVSs of the world,” Jeffrey S. Spigel, head of the antitrust practice at the law firm King & Spalding, tells them. “They’ll argue that you need to take into account competition from pharmacies that are in grocery stores, that are in Walmarts, that sell through mail order.”

Walgreens Boots Alliance, which said it anticipates synergies of $1 billion a year from the Rite Aid deal, will hold a one-hour conference call to discuss its fourth-quarter results and the Rite Aid acquisition beginning at 8:30 a.m. Eastern this morning. It will be simulcast here and archived for a year.

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