Breaking down the WAG-Alliance Boots deal
In June, Walgreens announced a two-step investment in a strategic partnership with Alliance Boots, to acquire a 45% equity stake in the privately held company for $6.7 billion in cash and stock in the first step with the option to acquire the other 55% approximately three years down the road at what is today being projected to be another $9.5 billion price tag in cash and stock.
By 2016, the deal is projected to transform Walgreens from a $72 billion operator, with two-thirds of its revenue coming from its U.S. pharmacy business, to a $130 billion global health-and-wellness player.
There are many factors unique to this deal that helped guide Walgreens toward a two-step transaction, one of the more significant of which is the fact that Stefano Pessina, Alliance Boots’ executive chairman, plans to keep 100% of the shares in Walgreens he receives in both steps for the long term.
Another significant factor: no planned SG&A savings achieved through employee layoffs. “There’ll be no reduction for us because we don’t have any overlap,” explained Wade Miquelon, Walgreens EVP and CFO. “Basically, almost all the savings will initially come from sourcing, and then later top-line revenue,” he said. “As long as we can structure ourselves to get the procurement savings, the two-step process provides us the luxury of time.” That time will allow Walgreens and Alliance Boots over the next 36 months to carefully craft an integration plan for the combined entity. “We are going to spend time to cautiously design a company that is truly global, that is structured for competitive advantage, that has the best players on both sides in the most meaningful roles [and] that maintains an equity and identity that is consistent with what it should be to the relevant stakeholders,” Miquelon said.
In the meantime, the two businesses can realize significant procurement synergies. Walgreens is planning to capture between $100 million and $150 million in first-year synergies. “Combined, we’ll by far buy the most generics in the world,” Miquelon said. “We’ll also be one of the biggest buyers of front-end items [across] branded and nonbranded.”
And with Alliance Boots as one of the largest wholesalers in the world, there are synergies to be realized across logistics, too. “They delivered more than 4.5 billion units to pharmacies, doctors, health centers and hospitals, actually more than any other wholesaler in the world in this industry,” Miquelon said. “Even though we have a very robust infrastructure and distribution system in the [United States], I’m sure they can share ideas about how to make it even more productive.”
One area in which Walgreens will benefit almost immediately is in beauty, particularly in private brand. Alliance Boots has long been acknowledged for its private health and beauty brand development, going all the way back to the launch of its No7 beauty brand in 1935.
Going in the other direction, Miquelon expects that Walgreens will be able to help improve Alliance Boots’ pharmacy systems, as well as help potentially build out a workplace and retail clinic business.
A carrot, a stick and closing the space between
A carrot, a stick and a face-to-face encounter. Those are the tools that will chisel away at healthcare costs, noted Wade Miquelon, Walgreens EVP and CFO. And Walgreens is uniquely positioned to help realize those savings.
To lower costs, you could raise co-pays or premiums to discourage unhealthy behaviors like smoking, poor diet or lack of exercise. That’s the stick. On the other hand, you could waive co-pays or a reduce premiums to help encourage healthy behaviors like regular checkups or disease-state management programs. That’s the carrot.
Or you could put the two together.
And if you add Walgreens’ 8,000-plus stores, retail clinics and employer-based health centers, on-site hospital pharmacies, specialty pharmacies and infusion centers all across the country — and the face-to-face interaction of the tens of thousands of pharmacists, nurse practitioners, physician assistants and physicians in them — then you really have something. Because then you can move the carrot and stick closer together, and shorten the distance to lower costs and expand access.
That’s how Walgreens believes it can help.
“If you do it telephonically and if you don’t have a carrot and stick in place, you can’t change human behavior,” Miquelon said. “We’ve been trying to reduce the 12 cents on the $1 [that represents prescription costs] for years, and we’ll still keep trying to do that. But if we can help people reduce the other 88 cents, that’s the big idea for us,” Miquelon added.
And that’s the big idea that keeps getting bigger in the years to come. Indeed, health reform creates more momentum for Walgreens’ transformation of community pharmacy and the expansion of the model.
“In general, healthcare reform is a net positive for our model because of a few different components,” Miquelon explained. First, will be the 32 million newly insured patients themselves — Walgreens, which already dispenses one out of every five prescriptions filled in the United States, is positioned to gain an even greater share of the new business, Walgreens executives believe, as payers look for ever more creative ways to lower costs and still expand access to care. “It will [facilitate] deeper and deeper relationships [for us] with payers,” Miquelon said.
Another component of health reform that will benefit Walgreens will be the rise of accountable care organizations, as payers demand better outcomes data as a means of measuring cost versus quality of patient care. The combination of its pharmacies, clinics and employer-based health centers — and all of the healthcare providers in them — is “the glue needed to make [the ACO model] stick,” Miquelon said. In a healthcare system where all providers are encouraged to practice at the top of their respective professions, 70% to 80% of all primary care services could potentially be provided in a Walgreens community pharmacy — particularly, one that has a retail clinic.
Critical to community pharmacy’s ability to play an integral role in the ACO model will be the ability to connect providers at every end of the patient care team. “They also need the information to be integrated so they can manage the entire patient’s health profile [at every point in the continuum of care]. Where we’ve gone with our systems and are going, we’ll be able to do that,” Miquelon noted of Walgreens’ recent announcement that it will roll a common electronic health record platform into all 8,000 stores, on-site hospital pharmacies and worksite clinics.
Its Well Experience stores are built to take advantage of it all. The rollout of the new store concept — which it had been testing in several stores — began in earnest last year in Indianapolis, and while it has been tight-lipped on which markets will come next and when, it will continue to open more stores with various levels of the Well Experience model. In true hedgehog fashion, Walgreens plans to go slow, tweak where it needs to and allow the stores to pay for themselves along the way.
Part of the Well Experience format is the ability to co-locate a Take Care Clinic, and while the company also has been reluctant to share its plans to add more clinics, as payers look to get more creative with plan design, it will become more important to have a national footprint for its retail and worksite clinics. “We’d like to become the third place you go for health care,” Miquelon noted. “You go to your doctor, your hospital, but you also go to Walgreens.”
So Walgreens’ future looks bright, Miquelon said, and so does the present. As of Sept. 15, Walgreens is once again part of the Express Scripts pharmacy network.
There is no denying the impact the feud had on Walgreens quarterly comps. In its most recent earnings call with analysts, Miquelon noted that comparable prescription sales were down more than 9%. Still, when you back out the impact of Express Scripts — a negative 0.7% hit, by Walgreens estimates — it works out to an adjusted prescription growth rate of 1.6%, “which compares favorably to the industry, including Walgreens, which decreased 0.3% over the same period, per IMS,” Miquelon explained, during the June 19 call.
And although the temporary loss of ESI customers had some impact on its front-end as well, where comps were down 0.9%, during the company’s recently reported third quarter, the fact that average basket sizes increased by 1.7% despite the fact that traffic in its stores was down 2.6%, was another strong indication that when you peel back the impact of ESI, Walgreens’ underlying business is quite healthy. It is also a strong indication that its transformation is working, and resonating with customers.
And with all of the ESI noise behind, Walgreens executives are quite confident in the company’s ability to get a great number of its patients to come back to Walgreens. “We have been out of networks before,” Miquelon said. “So we have some experience when we’re out of a network [and] what happens when we get back in.”
Walgreens expects a significant surge of pharmacy patients to come back immediately, he said. Others patients will take more coaxing, but the launch of its new loyalty program will help bring many more back over the next six to 12 months. “The No. 1 reason you get them back is because they came to you in the first place,” he said.
Next for Miquelon: Walgreens begins the first step of its two-step strategic partnership with Alliance Boots, looking for synergies and learning from the two businesses. “If you actually look under the hood, their business is very strong and very resilient to tough economies,” Miquelon said. On the wholesale side of the Alliance Boots business, business is brisk. European economies are looking for savings drivers, and in the healthcare space, that means generic conversion. “In the United States, generic penetration is about 80%. In southern Europe it’s only 25% and in northern Europe it’s 60%,” Miquelon said. Clearly, this is an area where the two companies believe they can move the needle.
Why Alliance Boots?
Much has been written already about Walgreens’ epic, two-step acquisition of Alliance Boots that in the end could be valued at $16 billion. As the largest single purchaser of prescription drugs in the world, with a global pharmaceutical wholesale operation to match, in-house manufacturing capabilities in over-the-counter health and wellness and generic drugs, Walgreens-Alliance Boots will have a whole lot more influence on the pharmacy side of its business.
There is no denying these game-changing aspects of the deal. But it’s important to understand just how strategically the two companies fit together. Walgreens set about this course with a definitive plan for how it planned to transform itself — the acquisition just enables it to step up the pace considerably. Walgreens president and CEO Greg Wasson walked DSN through how the deal acts as an accelerant for Walgreens’ five strategic imperatives to achieve its goal of becoming the preferred destination for health and daily living:
To transform the traditional drug store into a health and daily living destination. “[Boots] is probably the leading retailer in the world in beauty,” Wasson explained. “The store design, the experience — everything that helped them capture literally 50% of the beauty business in the U.K.”
But to be clear, that is a transformation that began long before the Boots stores came into the picture. “When we acquired Duane Reade … Joe [Magnacca] had taken his Shoppers Drug experience and his knowledge of what [retailers in Europe] were doing, and he went back and created the LOOK Boutique, and you’ve seen that begin to appear in stores across the chain,” he said. “Now you look at what Boots has, and you put that together, and we think we will be able to move a lot more aggressively into beauty.”
To advance the role community pharmacy plays in health care. “The big thing here is that Alliance Boots will help us become the world’s biggest supply chain and allow us to work in different ways with pharmaceutical manufacturers, front-end suppliers, payers, etc.,” Wasson said, that will lead to new opportunities to grow the business for all parties. “The way I looked at this [Alliance Boots deal] was, as our suppliers become more global, and they are looking for new and unique ways to grow their businesses, what an opportunity to create the first global retail pharmacy supply chain.”
To raise the game on employee engagement and customer service. “The one example I would give there would be the loyalty program,” Wasson said. “When I came into this role more than three-and-a-half years ago, one of the first things I decided was that we needed a loyalty program. … Alliance Boots has the leading program in all of Europe, and it is a big part of why they are able to play such a big role in beauty in the United Kingdom.”
To expand access across new markets and channels. “If you look at the progress we’ve made over the last three years and where we’re headed, Alliance Boots fits squarely into strategy No. 4,” he told DSN. “Channels implied ‘multichannel,’ that’s e-commerce, and Sona [Chawla, president of e-commerce] and her team are doing some great stuff [with] Drugstore.com and Beauty.com, mobile and some of the other things we’re doing there. … Obviously [Alliance Boots] has a leading e-commerce site and mobile channel themselves, and Sona and her team will get in there and see what’s the best of both worlds and accelerate that on both sides [of the company].”
“But markets means outside of the United States,” Wasson noted. “This gives us our first step outside of the United States, into emerging markets.”
To focus on costs. “There’s no doubt that we will be able to find ways to use our scale to help lower costs throughout the whole organization,” Wasson said. “And this is where the suppliers, I think, get excited. Certainly, we are going to take advantage of opportunities to buy and bring efficiencies together. But what’s really exciting is the fact that this is about innovation as well.”
Wasson uses Asia as an example. “I have been talking to Wall Street quite a bit about this,” he explained. “Two years ago, we decided we needed to have an Asian purchasing office. So we started about two years ago, and today we have six people working in an office in Asia, and we’re starting to bring a lot of products in. Boots has 150 to 200 people [in Asia]. They’ve had them there for 10 to 15 years now. And Alliance Boots will tell you that those people out there in Asia are not only there looking for cost opportunities — more importantly, they’re also looking for new innovation and new ideas for bringing products to market. We’re going to be able to leverage that.”
One area in which Walgreens will benefit greatly is in private-brand development— Boots has a research and development group with 400-plus associates in Nottingham, England, that is constantly at work on private-brand innovation. Walgreens has taken steps in this direction in recent years with the creation of such brands as Duane Reade’s Delish and its own Nice! brands, but Boots has long been acknowledged for its private health and beauty brand development, with a long, rich tradition dating all the way back to the launch of its No7 beauty brand in 1935. The deal will help Walgreens emerge with a private-brand presence in color cosmetics that people want to buy.
In addition to No7, it also features the Boots Pharmaceuticals (OTC), Soltan (sun care), Botanics (natural skin care), Boots Laboratories (anti-age partnership with Procter & Gamble) and Almus, which currently makes generic pharmaceuticals in five European countries. Given the market for multisource generic pharmaceuticals and future projections for the patent cliff, having an in-house generic pharmaceutical manufacturing capability is a decided advantage for a drug store operator with 11,000 stores in 12 countries.