Wednesday, August 06, 2014

Walgreens and Alliance Boots to Combine; No Inversion For You!

Walgreens and Alliance Boots today announced the accelerated formation of Walgreens Boots Alliance, Inc., a new US-based holding company. The transaction will close in the first quarter of 2015. Read the press release.

The company is (1) abandoning plans to do an inversion, (2) lowering its financial targets, (3) embarking on a $1 billion cost-cutting effort, and (4) reshuffling and combining the management teams. Stefano Pessina, who will be the combined company’s biggest shareholder, will have big strategic role. He’s reporting to Greg Wasson…for now.

Below are a few initial reactions, along with some selected slides from today’s conference call. Keep in mind that the second stage still requires shareholder approval. This is not a done deal.


Pharmaceutical manufacturers should immediately recognize that Walgreens Boots Alliance, Inc. will be a very big player in global pharmacy and wholesale channels. Here's how the company summarized the new entity's scope:

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Here is a summary of the transaction's Step 2:

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Note that Step 2 is subject to shareholder approval. Walgreens’ shareholders, however, have powerful incentives to complete the Alliance Boots acquisition. If the Step 2 option is not exercised, Alliance Boots can buy back 6.67% of Walgreens’ stake for only £1, reducing Walgreens’ stake from 45% to 42%. Shareholders will want to avoid being stuck with 42% of a UK/European company.

Let's see how shareholders feel about today's announcement.


Back in March, President and CEO Greg Wasson was emphatically denying the possibility of such an inversion.  By June, he completely reversed course. As I noted last week, Walgreens' management neglected to get in front of this story, so politicians and anti-Walgreens activists led the narrative.

In today’s release, the company states that it “thoroughly evaluated” combining Walgreens and Alliance Boots under a foreign parent company. Here’s the key sentence from today’s press release:
“We took into account all factors, including that we could not arrive at a structure that provided the company and our board with the requisite level of confidence that a transaction of this significance would need to withstand extensive IRS review and scrutiny.”
On this morning's call, Wasson also emphasized the political challenges to Walgreens' government business.

Given the circumstances, this makes sense. When the U.S. president and Treasury Secretary start pointing fingers at your purported un-American activities, then “retreat” is a sound tactic.

Of course, it also illustrates how management had no voice in the public debate over Walgreens’ inversion. Even the no-inversion news was leaked on Tuesday by Sky News, which prompted this morning’s hastily-arranged press release and conference call.


Here’s the new blended management team:

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More to come.


  1. I applaud the Walgreens decision to remain an American firm and pay US corporate taxes. Frankly, had they not done so, they might have been shut out of some provider networks. Good move, showing smart corporate and ethical behavior.

  2. They would have still paid US taxes on their US operations if they had inverted. It's my understanding that they are currently being taxed twice on their overseas operations. Once by the countries they do business in and again in the US. If they had done the inversion they could have avoided paying taxes on business operations not located in the US.
    I think this is probably still the best decision for them however because the stigma of being an "Un-American" company would have damaged them greatly.

  3. “…significant amount of wasteful drug spend” often used to mean “unable to reach satisfactory rebate agreement” on brand drugs. I’ll bet it still does. Nothing wrong with that – the clients get the huge share of the benefit from those rebates, rather than the PBM, which is as it should be in a competitive market. But this is what started a big war with Pfizer a few years ago, and the PBM won that one (and many since).

  4. Sometimes when I read PBM marketing materials making some claim about putting clients first or maximizing client value, this line from one of my favorite movies comes to mind:

    Anyhow, I always find something good on this site to get me thinking. Thanks again Adam.

    Has it crossed anyone's mind that the choice to exclude/not exclude can have more to do with non-rebate associated revenue (e.g., "other" manufacturer revenue). In such cases, a PBM can surely agree to contract language touting 100% pass through of rebate revenue... AND give 100% of rebate revenue to clients (but, of course why would they ever want to do that). They are only doing what they exist to do: Maximize shareholder value. To the extent that objective aligns with maximizing client value, plan sponsors should feel good. To realize when misalignment occurs, and to find help to do something about it... Therein lies the rub.

  5. Thanks for sharing the report. Interesting perspective. The NBCH is correct -- there is a need for independent, peer-reviewed analysis of savings from formulary exclusion.

    P.S. Nice to see that the NBCH had the good sense to cite Drug Channels :)

  6. The tax discussion was very misinformed, as I note in Noise and Nonsense Over Walgreens’ Inversion Plans. Due to ineffective PR management, Walgreens left itself no choice except to back away from inversion.