Wednesday, October 22, 2008

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).


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.


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.


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


  1. Seems the big get bigger.
    I re-read your WMT/CAT posting. What I find amazing is that you don't see restrictive agreements like this with the large chains. Seems like WAG or CVS would both be on this type of deal. They have more stores.

  2. I am trying to understand the role of generic drugs vs. speciality/namebrand/patent protected drugs in reference to pricing. If the trend is more generic drugs doesnt that give a competitive advantage to a walmart who has the scale to be able to price out just about anyone? Are there limits on just how little margin they can make on drugs to entice someone in the store. On the other side for the patent protected drugs is the price and margin dictated by the manufacturer with absolutely no deviation or can the walgreens and walmarts of the world change how much the final sale price is for these type of drugs.

    Assuming the customer is normally on a copay or subsidized prescription plan and they copay is below the price say a walmart is charging doesnt the overall cost become a non issue? or does the inverse hold true, by managing the margin on the backend of the deal is a large retailer able to create a lower price environment using generics to win customers away from a walgreens or CVS.

    Sorry for the long question, I guess I am just having trouble understanding how this market works since with the Medco's of the world in the middle giving a customer a 10 dollar copay for drugs and walmart on the other end saying they will charge 4 dollars for a group of generics it would seem that even though the generics offer price relief the managed plans put a backstop in place with the prescription plans to really dissuade any type of price wars or competitive pricing on the generics. Nothing is free in this world, if the drugs cost 100 dollars and the copay covers 10 dollars who pays the other 90 dollars plus the margins to all involved? How is that money collected, does it come from a premium paid into a healthcare plan that is then put into a pool of money used for prescription plans? The case that I have seen made which bothers me is that having pricing pressure or the emergence of new and lower priced generics really offers little true overall cost relief and just lines the pockets of the walgreens and cvs's of the world. why not just lower the price down to an acceptable point at time of sale and take the overall spend from say 100 dollar to maybe 25 or 50 with the seller still getting a large margin on the sale? I guess I feel like I am missing something in the mechanics of this industry and I am trying to correctly analyze the situation. any insight is greatly appreciated.

  3. To the 2nd anonymous commenter:

    Email me and I'll see if I can help you understand how the system works.


  4. As a quick postscript to my comments, McKesson just renamed its specialty group following the Walgreens deal:

    McKesson Renames Specialty Business Unit ''McKesson Specialty Care Solutions'' Following Completion of OTN Integration