Walgreens-Alliance Boots merger could redefine retail pharmacy

Following the announcement of the purchase of 45% of Alliance Boots, a mostly UK-based pharmacy chain and European drug wholesaler, Walgreens’ stock fell nearly 6%, and many analysts were critical of the trans-Atlantic partnership, saying that Walgreens has problems to address at home (its ongoing dispute over filling prescriptions for members of the Express Scripts PBM), and is making the move at a time when Europe is in the midst of a financial crisis. But there are many longer-term considerations to factor in: whether the wellness business (as opposed to healthcare) will take hold across the industrialized world; how Walgreens will increase its presence as an actual healthcare provider (through its Take Care in-store clinics); and—with implications both for manufacturers and for drug wholesalers—how the combination of a major retailer and a major wholesaler will work out. Walgreens says that the combination makes the two companies the largest single buyer of pharmaceuticals in the world.

Walgreens announced that it will buy nearly half of Alliance Boots for $6.7 billion in combined cash and stock, with the intent to acquire the rest of Alliance Boots within three years for an additional $9.5 billion, plus the assumption of a reported $11 billion in debt (current estimate). For now, both companies will continue to operate under their own names, and there are no layoffs expected. Walgreens says that it will achieve savings of $100-150 million now, and $1 billion by the end of 2016 through procurement synergies (“including prescription drug”) and revenue synergies by bringing Alliance Boots high-end wellness and beauty products to the US—something that Alliance Boots has been looking to do.

The combination will have 11,000 stores in 12 countries (Alliance Boots has 3,200 pharmacies, mostly in the UK, but also in other European countries, as well as China, Thailand and the Middle East.) The Alliance Boots wholesaling operation has 370 distribution centers, serving 170,000 pharmacies, clinics and hospitals in 21 countries. Last year, Walgreens had sales of $72 billion, and Alliance Boots, $36 billion.

This transaction is occurring while Express Scripts is still digesting Medco, a merger of two of the largest PBMs in the US; a year after Cardinal Health made a major acquisition of a drug wholesaler in China, and five years after the combination of Caremark, then the leading US PBM, and CVS, the No. 2 US pharmacy chain (a merger that some analysts are still saying should be unwound). Retail pharmacy, and drug wholesaling, are morphing into something else today.