Thursday, March 24, 2016

Walgreens Boots Alliance Gets Busy with OptumRx and AmerisourceBergen Deals

Our spidey sense tells us that Walgreens Boots Alliance (WBA) has been one busy company lately. As expected, WBA has increased its ownership stake in AmerisourceBergen to about 15%. A second seat on ABC's board is not far away.

Somewhat less expected: WBA has stepped into the parlor of UnitedHealth Group’s OptumRx PBM and become its preferred pharmacy partner.

Below, I provide some commentary to help you untangle these deals and figure out what they mean for the drug channels web.


Here’s the WBA-OptumRx announcement: OptumRx and Walgreens Partner to Improve Consumer Convenience, Cost Savings and Outcomes.

The deal’s key element lets OptumRx beneficiaries fill 90-day prescriptions at the same out-of-pocket copayment in any Walgreens retail pharmacy nationwide or at an OptumRx mail pharmacy.

By linking up with Walgreens’ broad retail network, OptumRx gains a viable multi-channel option to compete with CVS Health. By becoming the preferred retail pharmacy for OptumRx’s PBM business, Walgreens gains incremental store traffic, albeit at a presumably reduced margin.

The deal validates CVS Health’s channel-agnostic Maintenance Choice program, which is the most prominent limited network model for commercial plan sponsors. Under the program, a beneficiary can obtain maintenance medications from either a CVS retail pharmacy or a CVS Caremark mail pharmacy. This model lets consumers choose their pharmacy channel (mail or retail) but limits that choice to CVS Health dispensing channels. Consequently, the program benefits both CVS Health’s retail business and its PBM business. Chapter 7 of our 2016 Economic Report on Retail, Mail, and Specialty Pharmacies reviews narrow pharmacy network models. Section 7.2.2. analyzes Maintenance Choice.

Competing PBMs cannot readily match the Maintenance Choice program, because a separately owned PBM and pharmacy chain are always battling over the per-prescription dispensing profit. CVS Health, however, owns both channels, so it can adopt a “money doesn’t know where it comes from” mantra.

Now, WBA and UnitedHealth Group’s OptumRx PBM have a sort-of similar offering. Since there is no ownership relationship, the arrangement will never be as integrated as CVS Health’s model. The independent business interests of WBA and OptumRx will always lie just below the surface. OptumRx, however, is less committed to mail pharmacy than is Express Scripts, so the program has a reasonable chance of succeeding.

This deal is another negative for the embattled Express Scripts. Here’s what I told The Wall Street Journal in Walgreens, UnitedHealth Form Pharmacy Partnership:
It also damped anticipation that Express Scripts Holding Co., the largest PBM, might forge a new partnership or even merge with Walgreens, which now seems unlikely in the near-term, analysts said. “There are not a lot of players left, so Express Scripts is left standing when the music stopped,” said Adam Fein of Philadelphia-based Pembroke Consulting, who tracks drug distribution.
Pharmacy has become the land of the giants, with larger companies consuming all or part of the smaller players. In a more-integrated healthcare system, will the pure-play PBM model lose relevance?


Here’s the WBA-ABC announcement: Walgreens Boots Alliance Exercises Warrants to Purchase AmerisourceBergen Shares.

For background on the transaction, see my analysis of the complex financial relationship between AmerisourceBergen and Walgreens Boost Alliance in Why Walgreens Boots Alliance is Triggering a Huge AmerisourceBergen Stock Buyback. Section 9.5.1. of our 2016 pharmacy report contains updated information.

Briefly: ABC granted equity warrants to the predecessor companies that combined to form Walgreens Boots Alliance. The first tranche of warrants were exercised last week, which brought WBA’s ownership stake in ABC to about 15%. In March 2017, WBA will have another set of warrants to purchase an additional 11.4 million shares of ABC’s common stock at an exercise price of $52.50 per share.

WBA also has the right to acquire 19,859,795 ABC shares on the open market. Once it does so, WBA can designate a second board member. According to last week’s press release, WBA has purchased 11,461,043 of these shares, so it would need to spend about $731 million (8,398,752 shares @ $87/share) for the second seat.

Right now, Ornella Barra, a Walgreens Boots Alliance executive who runs its global retail and wholesale business, sits on ABC’s board. Ms. Barra, of course, is also the self-described “life partner” of Stefano Pessina, global channels overlord and executive vice chairman and chief executive officer of Walgreens Boots Alliance. She is also well known for her marvelously hagiographic website at


As these deals illustrate, WBA is no itsy-bitsy channel participant. It’s spinning a complicated network of silky connections throughout the healthcare system. “Will you walk into my parlor?” said the billionaire to…everyone else.

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