News broke in the Wall Street Journal on Monday, Feb. 12, that the leading pharmacy chain is looking to merge with the No. 2 drug wholesaler in the US. Two facts were quickly cited by the WSJ and other business reporters: Walgreens Boots Alliance (WBA) already owns 26% of ABC, as part of a path-breaking 10-year supply agreement forged between the companies in 2013; and the foray by Walgreens’ executive chairman, Stefano Pessina, a serial acquirer, is a reaction to the pending $69-billion bid by CVS Health to merge with Aetna, a leading health insurance company. And behind the CVS-Aetna deal is the worry that chain pharmacies and drug wholesalers have over whether Amazon will enter those businesses (it’s going on six months since the Amazon rumor-mongering cranked up without a substantive move by the e-commerce giant—so it remains no more than a rumor).
Both WBA and ABC had little to say about the proposal, which might go nowhere given its preliminary nature.
WBA has a market cap of around $68 billion, while ABC’s is just under $20 billion (although its stock price saw a double-digit jump after the news came out). Besides the share of ABC it already owns, WBA also represents about a third of the volume of drugs ABC distributes. When the supply agreement was announced in 2013, ABC joined in a joint venture, Walgreens Boots Alliance Development, to pool the companies’ drug purchasing globally. (In Europe, Walgreens Boots Alliance is both a major chain pharmacy and a major drug distributor.)
Besides its strong base in North America and Europe, WBA also has business in South America and parts of Asia; ABC has a partnering agreement with a Brazilian drug distributor, and has been bulking up the business that its global express delivery company, World Courier, is doing. Walgreens is also currently in the process of gobbling up some 1,900 stores from Rite Aid, while ABC is in the process of absorbing most of H. D. Smith, one of the largest privately held drug distributors in the US.
The nominal rationale for such a vertical integration is business synergies and market clout, but since both companies’ businesses are already intertwined, synergies are likely not to be a dramatic change from current practices. Both WBA and ABC are major players in specialty pharmaceuticals, with Walgreens Specialty Pharmacy, and the former AmerisourceBergen Specialty Group reorganized last year (in part) as Global Commercialization Services. That combination of specialty services could be a significant factor for pharma companies commercializing new products. Unlike the CVS-Aetna bid, which pulls both of those companies closer to the healthcare-delivery business, the WBA-ABC proposal seems to supersize drug distribution and retailing, and confronting the Amazon boogeyman head-on.