* Walgreen, Alliance Boots to take stake of up to 23 pct
* Cardinal says made plans to mitigate loss
* AmerisourceBergen shares gain, Cardinal falls
By Caroline Humer and Jessica Wohl
March 19 Walgreen Co and partner
Alliance Boots said on Tuesday they signed a 10-year
deal with AmerisourceBergen that will include daily drug
distribution, enabling Walgreen to increase its sales of pricey
Walgreen, the nation's largest drugstore, distributes more
than 80 percent of its own drugs, but over time most if not all
of that distribution will be handled by AmerisourceBergen.
Much of what it sells now are bulk, low-profit
prescriptions; by combining its distribution in the United
States and Europe with AmerisourceBergen, Walgreen will be able
to negotiate better prices for those bulk drugs. In addition, it
said it will have new access to more specialized drugs, like
those for cancer treatment.
AmerisourceBergen, which said the contract is worth $28
billion in fiscal 2014, will replace Cardinal Health Inc
, whose distribution contract with Walgreen's ends in
August. Cardinal shares fell 7 percent to $42.76.
There is pressure on the healthcare industry, from
pharmaceutical makers to sellers, to cut medical costs,
especially as millions of Americans will soon receive more
healthcare coverage. Consumers have also reduced their own
spending on prescriptions, making it even tougher to increase
profitability in the business.
The move will give AmerisourceBergen and Walgreen a boost in
size that can help them negotiate better prices.
"If you run more product through your network, the more you
can scale the assets, the more you can scale costs, and the more
bargaining power you have," said Vishnu Lekraj, an analyst at
Walgreen, the largest U.S. drugstore chain, will use
AmerisourceBergen's network to start daily distribution of
drugs. Previously Walgreen used its own employees,
transportation and warehouses to ship products on a daily basis
and used an outside company like AmerisourceBergen weekly.
Walgreen and Alliance Boots have the right to buy up to 23
percent of AmerisourceBergen, starting with a 7 percent stake on
the open market, now valued at about $800 million. Walgreen and
Alliance Boots also received warrants exercisable for 16 percent
equity in Amerisource. The first tranche, an 8 percent stake,
can be exercised at a strike price of $51.50 in March of 2016.
AmerisourceBergen shares rose 4.4 percent to $50.42 in
FLAT 2014 FOR CARDINAL
Cardinal Health said in a statement it has been planning to
mitigate the possible contract loss. Cardinal is still targeting
fiscal 2014 earnings from continuing operations that are at
least similar to fiscal 2013's expected range of $3.42 to $3.50
per share. It said the contract expiration would not affect
fiscal 2013 earnings.
Moody's Investors Service placed Cardinal's debt on review
for a downgrade, noting that it was one of the company's two
largest customers and worth 21 percent of its 2012 sales.
Cardinal also has a contract with drugstore CVS Caremark
Corp that expires this year.
Cardinal CEO George Barrett said in an interview that the
company has expanded its business to include distribution to
growing ambulatory and surgery centers as well as clinics.
"No one ever likes to lose a customer. We're obviously in a
very competitive business and we've been thinking about this and
really planning how to balance our business," Barrett said.
Shares of Walgreen were up 6 percent at $45, their highest
since June 2011, when the company announced its contract dispute
with pharmacy benefits manager Express Scripts Holdings.
Walgreen on Tuesday separately reported better-than-expected
second-quarter earnings. It reported net income of $756 million,
or 79 cents per share, up from $683 million, or 78 cents per
share a year earlier. Sales were flat at $18.65 billion.
PRESSURE ON HEALTH SPENDING
AmerisourceBergen's contract includes the distribution of
branded, generic and specialty drugs to retail stores, mail
order and specialty pharmacies.
"Alliance Boots and AmerisourceBergen are experts in
pharmaceutical supply chain distribution," Walgreen CEO Greg
Wasson said on a conference call. "We are very good at it, but
the combination of what they both do to improve our supply
chain, take that off of our hands, and improve our service
levels is really the opportunity that we are excited about."
The move will give Walgreen access to better rates on
specialty drugs used to treat diseases like cancer, rheumatoid
arthritis and multiple sclerosis, which have higher profit
margins but are also more expensive to keep on hand. More and
more of these drugs are becoming available in oral pill form.
"A network of 8,000 stores could never have those drugs in
stock. They couldn't afford to carry them," BB&T analyst Andrew
Getting the drugs in daily deliveries from the
AmerisourceBergen may also mean lower prices for Walgreen which
will not have to pay a mailing fee, he said.
Walgreen's deal to buy a stake of AmerisourceBergen comes at
a time when the U.S. healthcare industry is in the midst of an
overhaul. President Barack Obama's Affordable Care Act aims to
cut the rise in spending on healthcare, and levies taxes and
regulations on most healthcare companies.
"It's a trend of everyone having to be larger to compete in
the new world, post ACA," said Les Funtleyder, a strategist at
investment firm Poliwogg. "You'll see increasing tie-ups
between industries that might not have always been tied up."
GAINING BOARD SEATS
Amerisource has a market capitalization of about $11
billion. If the pharmacy chains fully exercise their rights,
they will together be the biggest shareholder in Amerisource,
based on current share holdings. They will hold up to two board
Amerisource said the deal, effective Sept. 1, was expected
to contribute about 20 cents in earnings per share in fiscal
2014 ending September.
But during a conference call the company also said it
expected its profit margins to be pressured because of the deal.
Amerisource said it now expected earnings of $2.96 to $3.06
per share from continuing operations in fiscal 2013 ending
September, down from its previous forecast of $3.06 to $3.16.
The company expects incremental brand revenue of at least $2
billion in September and raised its revenue growth forecast to
8-11 percent for the fiscal year.
It had previously forecast revenue growth of 6-9 percent.
Amerisource had revenue of $79.49 billion in fiscal 2012.