CVS, MCK, RAD, WBA: How WBA or CVS can fight narrowing retail networks – buy RAD

Richard

US retail pharmacy dispensing margins have grown to a point at which forcing them lower is a priority for drug benefit designers. Because the US has roughly 34% more pharmacy outlets than it needs, this can be (and is being) done by moving beneficiaries into narrower (or at least tiered) drug benefits

A logical countermove from the perspective of drug retailers is to become an ever more essential part of any region’s retail pharmacy network – simply by increasing average market shares in key regions

A WBA acquisition of RAD would grow the NEWCO’s population-weighted market share (per metropolitan statistical area or ‘MSA’) by 7.8%; a CVS acquisition of RAD would increase population weighted market share of the NEWCO by 6.1%

Because WBA would be required to divest a smaller percentage of the acquired RAD outlets (9.9%) than CVS (24.2%), net of transaction costs RAD is ‘worth’ more to WBA than to CVS

The margin structure of RAD’s pharmacies is substantially less healthy than either WBA’s or CVS’s, and because efficient central sourcing plays such a key role in outlet profitability, it’s reasonable to expect that the margin structure of an acquired RAD outlet would migrate to very nearly that of its WBA or CVS siblings. This fact alone is sufficient to make RAD affordable to either WBA or CVS at substantial premia to RAD’s current share price. And, the likelihood that gross margins for a WBA/RAD or CVS/RAD NEWCO would remain higher longer than for WBA or CVS alone only serves to make the strategy more compelling

As RAD’s primary wholesaler, MCK (which does not service either WBA’s or CVS’s retail outlets) loses the most from a WBA or CVS acquisition of RAD. We estimate that RAD accounts for roughly 12 percent of MCK’s revenues

For our full research notes, please visit our published research site

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