Walgreens-Alliance Boots tie-up is formally approved

So long WAG, hello to WBA as pharma manufacturers look at a consolidating buyer landscape


On the last day of 2014, the union of Walgreens, in the US, and Alliance Boots, headquartered in Bern, Switzerland but operating throughout Europe and elsewhere, was completed. Just prior, Walgreens shareholders approved the second stage of a two-step acquisition, first announced in mid-2012. The remaining 55% of Alliance Boots was purchased for $5.3 billion (in a previously announced action); total acquisition cost to Walgreens was approximately $12 billion. Along the way, a motion to relocate the company to the UK—as a financially beneficial tax inversion—was canceled; the combined company, to be called Walgreens Boots Alliance (WBA), will remain headquartered in Deerfield, IL.

However, another preliminary choice, that Walgreens CEO Gregory Wasson would head the company, changed as Wasson announced his retirement. Stefano Pessina, head of Alliance Boots, will be acting CEO. (Pessina is a story in himself, having previously merged Alliance, a European wholesaler, with the UK pharmacy chain Boots, then taking the combination private; one recent press report calls him a “world-class tycoon.”)

There are many ramifications to the merger, which Wasson characterized as forming the first “global, pharmacy-led health and wellbeing enterprise.” WBA will have more than 11,000 stores around the world (Walgreens has more than 8,000 in the US). In 2013, Walgreens announced a pioneering, 10-year supplier relationship with AmerisourceBergen, and both Walgreens and Alliance Boots became equity shareholders in that company. Collectively, they operate a drug-purchasing enterprise, Walgreens Boots Alliance GmbH, which is providing global sourcing for the companies. That development set off a scramble with the other two Big Three US wholesalers; McKesson acquired Celesio, a leading European wholesaler, and Cardinal Health announced a sourcing agreement with CVS Health. All three companies (as well as Alliance Boots leading up to the finalized merger) have been purchasing distributors in Europe, Asia and South America.

Both wholesalers and pharmacy chains are being squeezed by declining reimbursement rates for filling prescriptions, and by a two-year run of price appreciation by generics manufacturers (Walgreens got caught up in a $1-billion miscue between supply and pricing contracts last summer, leading to the resignation of the then-CFO). In the short term, one goal of WBA is to bring the US pharmacies into a closer balance between front-of-store merchandise sales and back-of-store pharmacy; Walgreens has been generating one-third of its income from the former, while Alliance Boots stores have been generating roughly half. Another trend to watch is whether WBA can succeed in becoming a more integral part of healthcare delivery in the US, through retail clinics and other healthcare services, something that most of the major drug chains are attempting.

Pharma manufacturers—especially those of generics—are looking at a more consolidated buying universe, but the latest round of pharma mergers is enlarging their scale as well. At the same time, healthcare delivery networks are consolidating, leading to an environment of Big Pharma, Big Wholesale/Distribution and Big Healthcare, each fighting for its piece of the healthcare revenue pie.