The Walgreens-McKesson Specialty Handoff

Walgreens (WAG) announced the acquisition of McKesson’s (MCK) specialty pharmacy business yesterday in a win-win transaction for two major Drug Channels participants. See Walgreen Co. to Acquire Specialty Pharmacy Business from McKesson Corporation.

The deal makes sense for both parties as long you understand that specialty distributors sell products to physicians, providers and pharmacies, while specialty pharmacies dispense products to individual patients. It also makes a lot more sense for Walgreens than buying Longs Drug Stores (LDG).

GOOD FOR WALGREENS

Walgreens made a good strategic move when it acquired Option Care in July 2007. At the time, I wrote: “Specialty pharmaceuticals are the biggest driver of drug spending right now. There is a lot of money to be made managing the benefits for payers, but that’s only possible by also dispensing these drugs. Thus, Walgreens can continue to grow their small in-house PBM, which is not even ranked in the top 25 based on lives covered. I also think that today's acquisition reduces the likelihood that Walgreens will emulate CVS and acquire a PBM.” (See Walgreens Expands In Specialty from July 2007.)

My conclusion is still valid. Further investment in rolling-up specialty pharmacy fits better with Walgreens than merging with an independent PBM or buying a regional chain with overlapping geography.

The biggest specialty pharmacies are now owned by the big 3 PBMs – CVS Caremark (CVS), Express Scripts (ESRX), and Medco Health Solutions (MHS). Yet the overall specialty pharmacy market is still relatively fragmented, so there is plenty of room for further consolidation. Plus, Walgreens gains further opportunities for disruptive competition with PBMs – a strategic posture that seems to be paying off for Wal-Mart (WMT). (See WMT + CAT: Pharmacy's Future?)

Specialty drugs are also shielded from generics (for now). I expect a pathway for biogenerics to emerge within the next few years, although the strategic logic of the WAG-MCK deal is not affected by this future potential downside.

GOOD FOR MCKESSON

The deal is also a good move for McKesson. Specialty pharmacy is a very small part of the company’s overall specialty business, lacks scale, and is a fundamentally different business than McKesson’s core wholesale distribution operations. The company has wisely jettisoned other non-core businesses, such as the sale of its acute-care med-surg business to Owens and Minor (OMI) in 2006.

McKesson dramatically expanded its specialty distribution business when it acquired OTN/Onmark and combined the businesses under McKesson Specialty. (See my Oct. 2007 post Fresh Consolidation in the Oncology Channel for more on that deal.) McKesson is better off building scale against AmerisourceBergen's Specialty Group (ABC), the current market leader in specialty distribution.

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Hmmm, I sound really upbeat in this post. Hope I’m not getting soft in my old age!