Amerisource deal may not keep Walgreens competitive: analysts

FILE PHOTO: The exterior of the Walgreens store in Times Square is seen in New York, U.S., July 5, 2016. REUTERS/Shannon Stapleton/File Photo

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)

You may also interested in

Boston building with Citgo sign sold;...

Aug 12, 2016

A building that hosts Boston's iconic Citgo sign has been sold to a local developer known for being...

Webcam whale research buoyed by viewers around...

Aug 15, 2016

Canadian researchers are turning to internet to learn about the social behavior thousands of beluga...

Google's Duo app joins crowded field of video...

Aug 16, 2016

Google releases video calling app Duo in challenge to other popular services run by Apple,...

Google's search engine directs voters to the...

Aug 16, 2016

Google is pulling another lever on its influential search engine in an effort to boost voter...

2 injured, fire contained on docked Tahoe paddle...

Aug 17, 2016

Fire ripped through the second deck of a docked tourist cruise boat under repair at Lake Tahoe on...

The Next Daily is the new generation of online publication, serving you the most recent discoveries made in science and technology on a daily basis. At The Next Daily, we believe in the power of consistent and reliable reporting to inspire and move mankind forward.

Contact us: sales[at]thenextdaily.com