Tuesday, July 12, 2016

Walgreens to Valeant: You’ve Got a Friend in Me (PLUS: A Rite Aid Deal Update)

Last week, Walgreens Boots Alliance (WBA) provided a small but notable boost to Valeant Pharmaceuticals.

WBA co-COO Alex Gourlay said that the company was “satisfied” with its Valeant relationship. That’s no surprise, given the favorable economics for Walgreens. Gourlay went further, stating that WBA would be “very willing to help them in a positive way.” Hmmm.

WBA also gave a brief update on its planned Rite Aid acquisition, which it still expects to complete later this year. And the company still expects to divest only 500 stores to get the deal done.

Reach for the sky with my analysis and commentary on these topics below.


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

Last month, I reviewed the history and economics of Valeant Pharmaceutical’s complicated relationship with WBA’s U.S. retail pharmacy business. See Valeant Reveals the Bad News about Its Money-Losing Walgreens Relationship.

A reminder: Walgreens earns an “activity based fee” based on how much adjudication work it performs for each Valeant prescription. Furthermore, Valeant apparently agreed to pay a fee to Walgreens even if there was no third-party coverage. Valeant sells these products on consignment to Walgreens, so Walgreens has no inventory investment or reimbursement risk.

Unsurprisingly, Valeant has been losing money on many prescriptions that Walgreens dispensed. As I describe in my most recent article on Valeant, little can stop a Walgreens pharmacist from dispensing anything with a tricky prior authorization as a cash-paid script and just collecting the fee. Valeant CEO Joseph Papa told investors that he intended to fix this “unintended” consequence.

On last week’s WBA earnings call, Alex Gourlay, co-COO of WBA, addressed the Valeant situation publicly for the first time. When asked about his company’s partnership with Valeant, Gourlay gave the following upbeat answer:
“Yes, we are satisfied and pleased with performance in the dermatology business; the volume is as we expected. And remember, we have paid for the service we provide. We're not paid on the margin mix here at all. So we're satisfied the relationship is good. We know Joe well from the past from Perrigo where the group had a very good relationship with Joe and Perrigo.

And we are in constant dialogue with Joe and the management team…we are very willing to help them in a positive way. So it's early days for a 20 year contract, and from our point of view we are pleased. We want to help our partner to be more successful in the market.”
With these comments, Gourlay:
  • Affirmed that WBA is still committed to its 20-year agreement (described here)
  • Confirmed WBA’s activity-based fee arrangement with Valeant
  • Signaled that WBA is willing to “help,” albeit in an unspecified way
  • Indicated that when the road looks rough ahead, and you're miles and miles from your nice warm profits, CEO Papa should just remember what his old pal Walgreens said. Valeant, you've got a friend in me.
In response to Gourlay’s comments, Valeant’s stock rocketed up by $3, to $23 per share. That’s a mere $241 away from its 52 week high. As they say on Wall Street: This isn't flying. This is falling with style!

I’m not surprised that WBA is “satisfied” with its Valeant deal. I conservatively estimate that in 2016, Walgreens may earn $50 million or more in dispensing fees from Valeant. WBA has little incentive to cut Valeant a better deal without some offsetting concession.

Let’s see If Valeant provides more details during its next earnings release—whenever that happens.


On last week’s call, Stefano Pessina, global channels overlord and executive vice chairman and chief executive officer of WBA, emphasized that the proposed acquisition of Rite Aid is “progressing as planned.” Read my overview of the transaction and what it means in The Walgreens-Rite Aid Deal: Ten Things You Should Know.

As I highlight in Four Fun Facts About the Walgreens-Rite Aid Merger Agreement, WBA would be willing to reduce the combined Walgreens-Rite Aid store count by as many as 1,000 locations. That’s about 8% of the combined total 12,700 retail locations.

When asked about store divestitures last week, Pessina emphasized that the total number will likely be lower:
“We still believe that our initial estimate is correct. We still believe that at the end we will stay in the range of these stores that we initially indicated, around 500. And time wise, we still believe that we will be able to really do the deal, finish the deal by the end of this financial calendar year as we said. So by December, we believe that everything will be done. But of course, it doesn't depend on us, FTC will let us know when they are ready.”
Pessina would not comment on who might buy the divested stores. But I see many likely candidates, including small chains, other retailers, and foreign drugstore operators. Some stores could even be converted to pharmacist-owned businesses with the support of the national franchises.

I presume the claw chooses who will go and who will stay.


At next month’s NACDS Total Store Expo, we’ll hear from Steven Tyler of Aerosmith. (Yes, really.) May I humbly suggest a Walgreens-Valeant duet as an opening act? Here’s my suggested song. Click here if you can’t see the video.

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