Global Pharmacy Industry Set for Realignment Following Walgreens/Boots Merger

The previously announced deal between two of the best known pharmacy brands in the United States and Europe—Walgreens and Boots, respectively—creates the world's largest pharmaceutical wholesale and distribution network. Walgreens, already the largest drug-store chain in the United States, will make an initial investment of USD4 billion in cash and 83 million shares—worth roughly USD2.7 billion—in exchange for a 45% equity ownership in Alliance Boots. The company has an option for full ownership of the remaining 55% in three years' time. The second part of the transaction would be valued at around USD9.5 billion, as well as taking on Alliance Boots' outstanding debt, to the tune of around GBP7 billion (USD11 billion). The boards of directors of the two firms have unanimously approved the transaction.

For Walgreens, the deal turns it into a global player, having previously been almost exclusively a US story: the combined entity will have around 11,000 stores, including 7,900 Walgreens stores in the United States and 3,300 Boots stores in 12 countries. The company is already expecting combined synergies of around USD100–150 million in the first year, rising to around USD1 billion by the end of 2016. This is primarily to be achieved through procurement synergies, as well as combining the revenues streams of introducing product brands into their respective stores.

The announcement is clearly a transformational one for the global pharmacy industry, and it represents the first of its kind. The markets have generally responded positively to the transaction, although most analysts are seeking to understand the impact this will have on how to assess risk within the context of the newly combined company. Walgreens has been weighed down by significant risks within the US market, particularly in relation to its ongoing dispute with Express Scripts, which accounts for over 10% of the 809 million prescriptions filled at Walgreens in 2011. Earlier in 2012, Express Scripts also merged with Medco Health Solutions, where Walgreens filled another 125 million prescriptions. In addition to this, there have been ongoing issues related to reimbursement-rate pressures from domestic pharmacy benefit managers (PBMs) and state Medicaid programmes.

The deal does nothing to help some of these short-term, US-centric issues, and the risk of Medco customers being taken out of Walgreens stores is still real and tangible. Although it does mean that Walgreens can compensate for a shortfall in its US base with European income, it also adds a new, particularly volatile risk to its scenario planning: that of European austerity and pharmacy/wholesale dynamics. Alliance Boots has been forced to realign its business model in several key European markets in light of ongoing economic turmoil; most recently it amended its margin structure in Ireland.

Outlook and Implications

If and when the full takeover is completed in 2015, it is expected that the merged company could make savings of USD1 billion per year by 2016. For drug firms, this potentially means a more streamlined trans-Atlantic distribution network, while Walgreens' competitors will now need to reposition themselves and react according to the new global paradigm. This may express itself in a number of different ways: other competitors may focus more on emerging markets in order to reduce exposure to the European pharmacy market, where price cuts and general cost containment is significant, reducing profitability in several key markets.