Walgreens Boots Alliance, Inc. (WBA) on
Oct. 28 unveiled plans to purchase Rite Aid Corp. for $9 a share, or a total
enterprise value of approximately $17.2 billion after factoring in debt,
creating what many are calling a retail “behemoth” in the pharmacy space. Given
that WBA Executive Vice Chairman and CEO Stefano Pessina this year hinted
several times at possible merger and acquisition activity, the proposed deal
came as no great surprise to investors. But it raised several questions,
including how WBA will leverage its enhanced scale with payers and just what it
plans to do with the PBM EnvisionRx, which Rite Aid purchased in June.
Acquiring Rite Aid would give the
retail giant more than 12,000 locations in the U.S., or about one in five
retail pharmacies, estimates Pembroke Consulting, Inc. That network would be
larger than that of CVS/pharmacy, which plans to add about 1,600 Target Corp.
in-store pharmacy/clinic locations to its pharmacy network of 7,900 stores (DBN
6/26/15, p. 3).
“Ultimately, like many elements of the
health care market, two is better than three,” observed Evercore ISI Senior
Managing Director and Partner Ross Muken during an Oct. 28 webinar to discuss
the financial implications for investors. “I do think for the drugstores as a
whole, given how concentrated the PBM landscape is, it made sense for one of
the two players to take out [Rite Aid]. In our mind, a consolidated network
given how there has been a bias toward narrow networks makes a ton of sense.”
Walgreens Plans Rite Aid Buy
One of the big questions that remain,
however, is what kind of PBM strategy WBA will ultimately pursue. Muken
suggested that the company has two primary options once management gets its
arms around the PBM business: (1) Look to strategically align with a major PBM
like UnitedHealth Group’s OptumRx or Express Scripts Holding Co. — the former
of which he believes is more likely — or (2) “roll up” what’s left of an
“already quite consolidated” PBM market. Acquiring Rite Aid may not “solve
their PBM problem, but clearly I think [Walgreens] has more optionality now in
terms of directions,” he said.
Walgreen Co. previously operated the
PBM Walgreens Health Initiatives, which it sold to Catalyst Health Solutions,
Inc. in 2011, and in 2014 completed a two-phase purchase of U.K. retailer
Alliance Boots to form the “global pharmacy-led, health and wellbeing
enterprise” Walgreens Boots Alliance, Inc.
During an Oct. 28 conference call to
discuss fiscal 2015 financial results and the planned transaction, executives
were vague on plans for EnvisionRx. WBA Executive Vice President and Walgreens
President Alex Gourlay called the Rite Aid subsidiary an “important but
relatively small PBM business…with a lot of good capabilities and IT.” Once the
Federal Trade Commission (FTC) completes its review of the proposed
combination, WBA looks forward to “understand[ing] more about the business and
how it could really help us understand access in America better,” he said. “I
mean, our real purpose here with the deal with Rite Aid is to improve the
quality of pharmacy and to really just cross across some markets and make sure
we create a market which is more affordable and more accessible for everyone,
aligned with the government policy. So we think this could be our way into that
in terms of Envision.”
When Rite Aid in February unveiled
plans to acquire EnvisionRx, it appeared to be “building a mini-CVS Health,”
observed Pembroke President Adam Fein, Ph.D., in an Oct. 29 post to the Drug
Channels blog. But since then, “Rite Aid hasn’t executed on any new preferred
network offerings or specialty pharmacy strategies,” he pointed out. And
management’s comments about looking to understand the business suggest a “clear
retail mindset” and a lack of experience with payer businesses, he wrote.
WBA Executive Vice President and Global
Chief Financial Officer George Fairweather added during the call that the
company anticipates the transaction will contribute to earnings during the
first full year after it’s completed and that it will “begin working to
capture” at least $1 billion in gross synergies once the deal closes.
When asked whether it planned to
leverage the expanded pharmacy network with drug purchasers, Pessina asserted
that WBA did not pursue the acquisition to “increase [its] negotiating power
with payers and PBMs,” but rather to extract synergies, pointing out that
margins are decreasing for all retailers. “We are in an environment where there
is a lot of competition, and the fact that we put together two companies will
not reduce the competition,” he suggested.
“Is this a strategic spin or a frank
acknowledgement that PBMs are the power players in the drug channel?” asked
Fein. Given that about three-quarters of all store-based retail prescription
claims are processed by three main PBMs, WBA’s expanded scale could
theoretically “provide some countervailing power in its negotiations over
network access and reimbursement rates,” he suggested. “For instance, the
company may have to offer smaller discounts to participate in preferred
networks.”
WBA shares fell 11% by the close of
Oct. 28, which Deutsche Bank securities analyst George Hill suggested in an
Oct. 29 research note may have been partly driven by concerns about FTC
scrutiny of the proposed transaction. The National Community Pharmacists
Association and two lawmakers on the Senate Judiciary Committee’s antitrust
subcommittee have released statements urging regulators to closely scrutinize
the combination.
But Muken said given that Express
Scripts cleared its 2012 acquisition of Medco Health Solutions, Inc. and if CVS
is able to complete its deal with Target, “this is another one that is
certainly in the veil of acceptability.” Although Pessina declined to discuss
potential divestitures during the conference call, WBA reportedly told
regulators it would be willing to sell 500 to 1,000 stores in order to close
the deal. Pessina said WBA is working “closely with the regulator to bring the
transaction to a conclusion as soon as possible.” The company anticipates
closing the deal in the second half of calendar-year 2016.
When asked about the proposed
transaction and the potential to more closely align with retailers, Express
Scripts Chairman and CEO George Paz during an Oct. 28 conference call to
discuss third-quarter 2015 earnings said its relations with Walgreens,
particularly with its newer leadership, have improved and “the opportunities
are good.” But he reiterated prior assertions that Express Scripts’ clients
value choice.
“To the extent that we have
opportunities to use networks that are new and improving…it’s awful early to
say how all of this is going to play out and what the company is going to look
like as it goes through the FTC process,” added Paz. “But we’ll certainly keep
our eyes on that, and we’ll keep up our communications with Walgreens and CVS,
for that matter.”
In an Oct. 28 research note, Hill read
Paz’s comments as limited but positive. “We expect that Express will look to
capture for their clients some of the cost savings that WBA/RAD [Rite Aid]
generate through their merger. Express could also work with Walgreens to create
pharmacy networks for clients that save money,” he wrote.
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