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Five takeaways about the new Walgreens-Rite Aid deal

BY Michael Johnsen

The drug store industry awoke Thursday morning to arguably the biggest story of the year — the news that Walgreens and Rite Aid had agreed to scrap their original merger agreement one more time, this time in favor of a much smaller, seemingly more manageable deal to purchase 2,186 Rite Aid stores for $5.18 billion in cash.

In the first several hours following the announcement of the deal, Chain Store Age sister publication, Drug Store News identified five important takeaways from the blockbuster agreement.

1. The Federal Trade Commission hates health-related mergers and acquisitions.

Certainly, the news suggests that Federal trade regulators take a rather critical view of mergers among large healthcare stakeholders. The 18-month saga of Walgreens-Rite Aid follows the FTC’s opposition to other big health-related deals, including Aetna and Humana, Anthem and Cigna, and Allergan and Pfizer, suggesting the FTC has very real concerns about any one entity becoming big enough to control healthcare prices.

While the new Walgreens-Rite Aid deal presumably has a better chance of clearing the FTC, it’s still not a slam dunk. How much pharmacy market share is too much for the FTC is still unknown. “There’s a chance that it won’t go — that’s just the reality of the process,” Rite Aid chairman and CEO John Standley said in a June 29 conference call with analysts. “We believe [the new deal] makes sense, we just have to wait to see how it plays out.”

2. Amazon-Walgreens partnership?

As one door closes. … Unrelated to the Rite Aid deal, Walgreens Boots Alliance executive vice chairman and CEO Stefano Pessina was asked during a call with analysts if the company was concerned about the potential threat of Amazon’s purported interest in pharmacy. On the contrary, Pessina sees it as an opportunity. “I don’t believe Amazon will be interested in [the healthcare market] in the next few years,” he said during the June 29 earnings call. “If we were wrong [and they did enter the healthcare space], we wouldn’t exclude a partnership with them.”

Indeed, Walgreens has reinvented several aspects of its business around unique and innovative partnerships, including, most recently, its announcement that it would work with LabCorp to develop an in-store diagnostics business in select Walgreens stores.

3. What’s next for Rite Aid? (Part 1)

For one thing, Rite Aid emerges as a much leaner, multi-regional chain with its stores concentrated in the middle and west coast of the country, and with a bunch of cash to finally pay off its debt and improve its balance sheet — something the leadership team under Standley already has shown a talent for when cash was much harder to come by.

The remaining store base is concentrated on the West Coast, Pennsylvania, Ohio, Michigan and New Jersey. “[This store base] is a financially stronger group of stores on a per-store basis than the store base today,” Standley said. “We will have higher front-end average sales, script count and EBITDA per store. Almost 60% of the stores have been remodeled to the groundbreaking Wellness format, and these stores are in cities and communities where we have strong market share.”

As a footnote to the deal, Rite Aid has signed a two-year noncompete, agreeing not to re-enter or build new stores in markets where the divested stores are located.

4. What’s next for Rite Aid (Part 2)

What’s more, a new, even smaller Rite Aid could emerge with even greater purchasing power. That’s because as part of the deal, Rite Aid still has the option of joining Walgreens Boots Alliance’s generic buying consortium, giving it the buying strength of a much larger company.

“This provides us with an important tool for us to mitigate the reimbursement rate pressure we expect to continue,” Standley said. “The option to purchase from [Walgreens Boots Alliance Development] in the future is important in that it helps ensure that we continue to have access to competitive drug [pricing], whether it’s through that option or through McKesson or otherwise,” Standley added.

5. What’s next for Walgreens?

With the Rite Aid saga behind it, Walgreens will be able to focus 100% on Walgreens again. “Our focus will be mainly on Walgreens and on the stores,” Pessina said. “We have started to collect information and data on our customers in order to understand better what they want,” he said. “Now it’s time to put all of this together [and] reorganize our stores.” Looking ahead, Walgreens will focus on those categories that really resonate with their shoppers, Pessina said. “It’s not particularly useful to offer a bit of everything if people are not really appreciating it. We are focusing more on health and beauty, particularly.”

“We are moving into a phase beyond the beauty differentiation phase of simplifying our core offer,” Alex Gourlay, co-COO Walgreens Boots Alliance added. “The idea is to simplify these stores to such an extent that customers can find products more easily, and we can [rationalize the mix] on their behalf using the data we’ve been collecting the last three years.”

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