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March 20, 2013 6:30 pm
How hard can it be to move a bunch of pills around? Hard. Pharma distribution is a big business because the inventory is expensive, comes in zillions of varieties and retailers can’t afford to be caught short. The three major US drug distributors – McKesson, Cardinal and AmerisourceBergen – have a combined value of more than $50bn.
A 10-year distribution agreement between the largest retail pharmacy chain, Walgreen, and AmerisourceBergen was announced on Tuesday, and has a surprising feature. Walgreen and its partner Alliance Boots will have the right to buy 7 per cent of AmersourceBergen in the open market, and will be granted warrants, exercisable in 2016 and 2017, for another 16 per cent of the shares.
The companies talk about the equity stake aligning the interests of the two sides and sharing in the value created by the deal. There is truth in this, but there are other ways to achieve those ends. Walgreen, it seems, is moving towards vertically integrating the pharma value chain in the US (at the same time as it tries to integrate European and US pharmacy retailing by buying a major stake in, and potentially all of, Alliance Boots).
Walgreen’s rival CVS tried to integrate another part of the chain when it merged with the pharmacy benefit manager Caremark in 2006. PBMs negotiate prices with pharmacies on behalf of health plans, and the CVS-Caremark deal has raised questions of channel conflict – are health plans that do not use Caremark getting a fair deal from CVS? Do retailers other than CVS get a fair deal from Caremark? Whether similar conflicts will bedevil a Walgreen-owned distributor is hard to say. But like other retailers who already enjoy dominant positions in their core markets (Walmart comes to mind) Walgreen has little choice but to expand in new areas if it intends to keep growing.
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