Amerisource deal may not keep Walgreens competitive: analysts

By Ankur Banerjee

(Reuters) - Walgreens' potential deal for drug distributor AmerisourceBergen will boost its cash flow and push it deeper into a lucrative specialty pharmacy market, but may fail to keep it competitive in an evolving U.S. healthcare sector, analysts said.

A deal would not be a surprise, but analysts noted that it might cost Walgreens Boots Alliance opportunities down the line as the company tries to keep pace with rival CVS Health Corp, which is set to buy health insurer Aetna Inc, and possibly go up against Amazon.com.

AmerisourceBergen shares were up 8.7 percent in midday trading, while Walgreens shares were little changed.

"This purported deal wouldn't be shocking ... but we're currently struggling to see the strategic allure of the combination for Walgreens," Baird analyst Eric Coldwell said.

While the CVS-Aetna deal is expected to create a consumer healthcare giant that will only widen CVS' formidable reach, Walgreens will get no such lift if it buys AmerisourceBergen, in which it holds a 26 percent stake, analysts said.

However, any Walgreens-AmerisourceBergen deal would give Walgreens a bigger presence in the specialty pharmacy space, where it does not have adequate exposure, setting it up to compete better against CVS and pharmacy benefit manager Express Scripts Holding Co.

"As the broader healthcare sector focuses more on moving specialty drug administration out of facility-based (hospital/physician's office) settings, gaining a strong foothold in specialty through ABC could be a valuable strategic move," Jefferies analyst Brian Tanquilut said.

AmerisourceBergen and Walgreens have a 10-year deal, struck in 2013, that allows the drug distributor to buy drugs for Walgreens, the largest U.S. drugstore operator.

The Wall Street Journal reported on the potential deal on Monday, but said talks were in early stages.

"This deal has probably been brewing longer than they're letting on ... unlike CVS-Aetna, there are more immediate margin and synergy opportunities," said Brad Haller, M&A director at West Monroe Partners.

He, however, added that those cost savings may not be immediately achievable because Walgreens is already knee-deep in completing post-merger integrations with Boots Alliance and Rite-Aid.

"Adding on another large-scale integration would be difficult," he said.

Walgreens bought Alliance Boots in 2014 and said last year it would buy nearly 2,000 Rite-Aid stores.

A potential Walgreens deal comes as the U.S. healthcare landscape remains in a state of flux, with changes to the U.S. Affordable Care Act, escalating drug prices and Amazon's possible entry.

Analysts have long speculated that Amazon is likely to disrupt healthcare with deals with drug distributors, insurers or hospitals. Amazon Business, the company's business-to-business marketplace already sells professional medical products and hospital consumables such as gloves.

Amazon plans to expand the business, the WSJ reported on Tuesday, and recently dispatched employees to a large Midwestern hospital system, where hospital officials are testing whether they can use Amazon Business to order health-care supplies.

The news pushed down shares of dental supply companies Henry Schein Inc and Patterson Cos Inc. Shares of drug distributors Mckesson Corp and Cardinal Health were lower as well.

(Reporting by Ankur Banerjee in Bengaluru; Editing by Sayantani Ghosh, Bernard Orr)

Must Read

UK manufacturers see costs jump in wake of Brexit vote

Aug 16, 2016

Official figures show consumer prices in Britain rose more than expected in July, while the cost of raw materials for manufacturers are mounting as a result of the pound's drop in the wake of the vote to leave the European Union

Asian stocks mostly higher after Wall Street decline

Aug 17, 2016

Asian stock markets were mostly higher Wednesday after Wall Street declined

Are France's burkini bans sexist, or liberating?

Aug 17, 2016

Male officials are dictating what women can wear on French beaches _ and people across a wide swath of French society say that's a good thing

Search

Obserworld delivers the most accurate and up-to-date world news for the global audience with a thorough research and in-depth interviews. Discover the world through Obserworld.

Contact us: sales[at]obserworld.com