WAG/ABC – Quick Strategic Read-thru; Better for WAG than ABC

Richard

Walgreens (WAG) and AmerisourceBergen (ABC) yesterday announced a 10-year agreement in which:

  • ABC handles US brand and generic wholesale distribution operations for WAG;
  • ABC participates in global purchasing using the aggregated buying power of ABC, WAG, and Alliance Boots; and,
  • ABC participates in an expanded portfolio of manufacturer services

WAG and Alliance Boots have been granted warrants for up to 16pct of ABC equity, thus at least to some degree ABC used its equity to buy its way into a distribution agreement. By extension, this implies that the economic returns to ABC for being in the agreement must be well above the typical returns one would expect from a ‘normal’ distribution arrangement between a large US-based wholesaler and a large US-based warehousing chain pharmacy. This looks like a very high hurdle. There are three opportunities for ABC to create value in excess of ‘normal’, corresponding to the three elements of the deal in the bullet points above. And, there is a downside risk to ABC, or at least a practical limit to how far the WAG alliance can go – ABC is highly dependent on sales to US independent pharmacies, who are naturally wary of WAG…

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