With US Sales Floundering, Walgreens Looks Overseas

By Jill Brown - June 19, 2012

Health insurers this morning are watching another upheaval in their pharmacy supply chain, as major retail pharmacy Walgreen Co. said it would buy a majority stake in Alliance Boots GmbH.

Health insurers’ pharmacy partners have been consolidating at a rapid rate. After the two largest PBMs, Express Scripts Inc. and Medco Health Solutions, Inc., combined earlier this year, many pharma watchers had been expecting Walgreens to make a major strategic move, in the continuing effort to stabilize earnings and retain customers during the run-out of its now-expired Express Scripts contract.

But rather than the merger with rival drug store chain Rite Aid Corp. that many had predicted, Walgreens instead is looking overseas. Walgreens said its combination with Alliance Boots, unveiled this morning, will “create the first global pharmacy-led, health and wellbeing enterprise.”

Translation: Walgreens agreed to invest $6.7 billion in exchange for a 45% equity ownership stake in Alliance Boots, with the option to acquire the remaining 55% of Alliance Boots in three years. The deal, valued at about $9.5 billion in cash and stock, is expected to be completed by Sept. 1, pending regulatory and other approvals.

In the states, Boots may be best known among U.S. tourists and exchange students to the United Kingdom who stock up on the brand’s No. 7 lipstick. (Now Boots has over-the-counter beauty supply sales at Target Corp. and other retailers, so there’s no need to bribe friends returning from overseas.) But as Drug Channels blogger Adam Fein notes, Alliance-Boots actually is a European powerhouse “formed when Alliance Unichem, Europe's biggest drug wholesaler, merged with Boots, the UK's largest pharmacy retailer.”

Put together, the entity would be “the world’s largest purchaser of prescription drugs and many other health and wellbeing products,” with more than 11,000 stores in 12 countries, along with 370 pharmaceutical wholesale and distribution centers serving more than 170,000 pharmacies and other providers in 21 countries, Walgreens said.

Meanwhile, Walgreens’ domestic operations have suffered as a result of its Jan. 1 exit from the Express Scripts network, the result of a longstanding dispute over reimbursement levels. Walgreens had asserted that it would retain the majority of customers, but Express Scripts has reported that 95% of its accounts moved forward without Walgreens in their networks. Indeed, Walgreens today also reportedthat its fiscal third-quarter earnings fell almost 11% to $537 million from $603 million in the same quarter a year ago.