Tuesday, January 12, 2016

Walgreens Boots Alliance Spins the Valeant Deal, Preps for Rite Aid, and Hints at a PBM Acquisition

Last week, Walgreens Boots Alliance (WBA) held its latest quarterly earnings call. (See links below for materials.)

Its new Valeant deal was a hot topic for investors. Management took great care to assure Wall Street that it was not becoming Philidor RX V2.0 and dismissed any risks to its reputation. The top execs also highlighted the Valeant deal’s similarities to WBA’s European arrangements with generic manufacturers. So nothing to see here, move along?

WBA also gave a quick update on the Rite Aid deal, which it expects to complete by the second half of 2016, and made a few cryptic statements about “vertical integration.”

Below, I highlight and comment on intriguing comments from Stefano Pessina, WBA’s Executive Vice Chairman and Chief Executive Officer, and Alex Gourlay, Executive Vice President of Walgreens Boots Alliance and President of Walgreens. Fun stuff.

As always, I encourage you to read the original source material for yourself. Here are direct links to the information about Walgreens Boots Alliance’s first fiscal quarter of 2016:

WE ARE NOT PHILIDOR (REALLY)

You may recall that under the Valeant agreement, patients and physicians will be directed to Walgreens, which will be paid distribution and dispensing fees but won’t earn the usual pharmacy spreads. Valeant will sell its product on consignment to Walgreens. For background and my $0.02, see Walgreens and Valeant Devise a New Twist on Preferred Pharmacy Networks.

This deal has plenty of risk for Walgreens. As I discuss in an earlier article, Valeant had a controversial network of manufacturer-directed pharmacies, including the now closed Philidor RX. These pharmacies supported aggressive copay offset programs for Valeant’s comparatively undifferentiated traditional drugs. After news of these pharmacies’ services became widely known, the PBMs hurriedly got around to dropping the pharmacies from their networks. See After the Valeant-Philidor Blowup, PBMs Clamp Down on Network Pharmacies.

On last week’s earnings call, WBA executives signaled that they are mindful of the controversy around Valeant’s programs.

Here’s CEO Gourlay positioning the deal as a services opportunity:
“For example, in Valeant what we see is the opportunity to really take friction out for customers and patients and doctors and pharmacists so they can spend more time with patients, and therefore patients win…We're becoming more of a services company. We've been faced with things which have to do with the job of pharmacists, which is providing dispensing and making sure people understand their drugs properly. And that is great for pharmacists and great for the profession.”
Gourlay reiterated that Walgreens would not try to disrupt PBMs’ benefit design:
“[W]e're determined to be very transparent about what the real costs are as a result of this partnership…So we are working very closely not just with Valeant but with our PBM partners to understand their concerns, and we will take care of these concerns. We're not looking to disrupt the system in terms of what they are trying to do to lower costs. We're trying to take costs out of the system which will help them to lower costs for their payers. That's our intention.”
Hmmm.

Pessina also noted that the Valeant deal has “some similarities to the way we work with a number of pharmaceutical companies in Europe.” Gourlay referred to shifting WBA’s “best practice in Europe into Valeant.”

As you may know, the EU generic market operates differently from the US market. Generic dispensing rates are much higher in the United States, where generics account for nearly 90% of prescriptions. Overseas in 2013 (the most recent data that I have), generics constituted only 16% of the Italian market, 25% of the French market, and 34% of the Spanish market. Reimbursement policies are a key reason for the slower generic substitution within the EU.

BTW, George Hill from Deutche Bank expects WBA to generate $720 million to $855 million in incremental revenue from the Valeant deal.

AND ABOUT THOSE OTHER DEALS…

The WBA team made generally positive comments about the likelihood of completing the Rite Aid acquisition. Mark your calendars: the Rite Aid shareholder vote is on February 4.

And here’s an intriguing exchange about PBMs:
Mark Wiltamuth, Jefferies: Stefano, now that you've done this big horizontal acquisition, do you think there's a possibility of going vertical with your acquisitions moving forward and maybe contemplating a PBM transaction?

Stefano Pessina: Yes, you know what I think. I couldn't have been clearer since the very beginning. I have seen this market and I am really convinced that vertical integration is a necessity for the market, [by] market. It is part of what we have to do to reduce -- to control the costs in the healthcare arena.

Any kind of vertical integration is good. It depends on the opportunities that we will have. It depends on the availability of partners.

And also there are many ways to have a vertical integration. You can have a merger, which of course is the perfect way. But you can also have a commercial agreement, a very strong commercial agreement, and very strong partnerships. And as we have said many times, we are always open even for a partnership."
Is he hinting at Express Scripts? AmerisourceBergen? PharMerica? A partnership with OptumRx?

More to come!

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