You may have seen that retail drugstore giant Walgreen Co. announced that it and Alliance Boots, an international pharmacy-led health and beauty group, have entered a long-term partnership with AmerisourceBergen—one of North America’s largest pharmaceutical services companies. AmerisourceBergen will replace Cardinal Health, whose distribution contract with Walgreen ends in August. Walgreen explains that the relationship will enable the companies to benefit from greater scale and global opportunities and work together on programs to improve service levels and efficiencies, while reducing costs and increasing patient access to pharmaceuticals.
In making the announcement, Gregory Wasson, president and CEO of Walgreen, said that the move establishes “an efficient global pharmacy-led, health and wellbeing network.” In a later phone conference with reporters, he added that the move will make “some of these high-cost, complex medications available” in stores.
There are a number of consequences worth noting. For instance, an Eye for Transport article points out that the $400 bn 10-year agreement will create what Forbes magazine coined the “Earth’s Drugstore.” Furthermore, the agreement appears to create one of the largest and most influential global supply chains.
Steven Collis, president and CEO of AmerisourceBergen, explained during the announcement that the companies “have entered into a unique opportunity to unlock value in the pharmaceutical supply chain by collaborating to leverage all of our proven strengths.” He went on to add that the agreement not only expands the company’s U.S. business but also provides opportunities to grow its specialty and manufacturer services businesses internationally.
Indeed, AmerisourceBergen has serviced Walgreen’s specialty business for years. However, as it gets set to replace Cardinal Health, it will expand its services to include distribution of branded and generic pharmaceuticals to Walgreen’s 11,000 plus retail stores, mail order, and specialty pharmacies. Daily deliveries of drugs will also be provided to Walgreen’s stores, which will reduce inventory in Walgreen’s existing warehouses.
There are several interesting aspects to the deal. For starters, the contract is for 10 years, considerably longer than the usual three-year or five-year deals, explains an article on Pharmaceutical Commerce.
Then of course, there is the relationship between Walgreen and Alliance Boots, which has locations in 25 countries. Walgreen already entered a multi-year agreement to acquire UK-based Alliance Boots outright—it currently owns 45 percent of Alliance. The two companies also have formed Walgreens Boots Alliance Development GmbH, which enables the two organizations to supply each other products globally.
Another interesting part of the agreement is that Walgreen and Alliance Boots together have been granted the right to buy a minority position in AmerisourceBergen, starting with the right to purchase up to seven percent of its outstanding stock. AmerisourceBergen also granted to Walgreen and Alliance Boots warrants exercisable for 16 percent of the company’s equity. A Walgreen executive will be appointed to AmerisourceBergen’s board upon Walgreen and Alliance Boots together acquiring a five percent equity stake, and an Alliance Boots executive will be appointed upon exercise in full of the first warrants.
In the end though, the agreement is sure to have an impact on others in the industry, such as generic manufacturers and independent pharmacies that compete with Walgreen. However, there is increasing pressure on the healthcare industry—from pharmaceutical makers to pharmacies—to cut costs. Consumers have also reduced their own spending on prescriptions, making it even tougher to increase profitability in the business. The agreement addresses many of these challenges.