Featured in Health Business Daily, Nov. 28, 2017

Walgreens’ Smaller Rite Aid Purchase Leaves Fate of Envision PBM Uncertain

Reprinted from DRUG BENEFIT NEWS, biweekly news and proven cost management strategies for health plans, PBMs, pharma companies and employers. Subscribe today!

By Diana Manos, Senior Reporter
July 14, 2017Volume 18Issue 13

After 22 months of negotiations and wrangling with the Federal Trade Commission, Walgreens Boots Alliance, Inc. (WBA) on June 29 scaled back its original plan to purchase Rite Aid Corp., instead unveiling an agreement to acquire 2,186 stores, three distribution centers and related other inventory from Rite Aid for $5.1 billion in cash. Though once speculated by some insiders to be a move on WBA’s part to expand its PBM reach, that appears not to be the case. The purchase, if approved by the FTC, will not include Rite Aid’s PBM subsidiary, EnvisionRx, according to WBA spokesperson Michael Polzin.

In addition, Polzin says, the transaction “won’t have any impact on our business plan for AllianceRx Walgreens Prime,” the combined central specialty pharmacy and mail services company Walgreens formed through an alliance with Prime Therapeutics, LLC, a PBM that counts several Blue Cross and Blue Shield plans among its owners and clients (DBN 4/7/17, p. 4).

WBA initially planned to purchase Rite Aid outright for $9.4 billion in a deal unveiled on Oct. 28, 2015, but WBA later had to scrap the agreement and pay a $325 million termination fee. Yet despite all that difficulty, WBA appears to be confident that the new asset deal will garner the FTC’s approval.

The new transaction — which involves acquiring Rite Aid stores located primarily in the Northeast, mid-Atlantic and Southeast U.S. — is expected to close within the next six months, WBA said.

Drug Benefit News

Under the new WBA deal, Rite Aid will have a smaller retail footprint, with its business mix shifting towards the nearly $6.3 billion EnvisionRx PBM offering, said Garen Sarafian, an analyst with Citigroup. “[The] outcome could present potential M&A scenarios for current PBM participants seeking scale or healthcare services firms looking to add/bolster PBM capabilities, with potential strategic benefit from a retail footprint in select regions.”

He added that “a more focused smaller PBM could be an incremental headwind to [Express Scripts Holding Company] and the other ‘Big 3’ PBMs, CVS and OptumRx, within the smaller end of the market.”

Max Nisen, in a June 29 analysis in Crain’s Chicago Business, says the compromise deal gives Walgreens “a chance to be bold” — with PBMs and other pharmacy-related businesses making sense as possible targets.

“These deals would be a lot more expensive than even buying all of Rite Aid,” Nisen writes. “But [WBA CEO Stefano] Pessina is clearly comfortable with making a big splash.”

WBA Doesn’t Anticipate Trouble With the FTC

The new transaction includes the option for Rite Aid to sign a generic pharmaceutical purchasing services agreement with Walgreens Boots Alliance Development (WBAD), exercisable through May 2019. “Rite Aid has the option to purchase generic drugs that are sourced through an affiliate of WBA at cost, substantially equivalent to Walgreens for a period of 10 years,” according to Rite Aid.

This aspect of the deal will help Rite Aid stay competitive following the deal, said Marco Pagni, Walgreens’ general counsel, on a June 29 earnings conference call to discuss WBA earnings. “Clearly, its option to join our procurement vehicle, WBAD, will help it with its cost of goods going forward, which we believe is important for its competitive position in the market,” he said. “And I express no view as to how the FTC will see that, but one could imagine that, that might be important though.”

Polzin implies that Walgreens is somewhat optimistic about the FTC’s approval. “In terms of getting regulatory approval for the new transaction, you can assume we’ve taken into account specific feedback we’ve received from the FTC since October 2015, when we first announced the agreement,” he tells AIS Health. “We’ve designed this new agreement in a way that has been very carefully thought through with Rite Aid to take into account all of the feedback we’ve received during the review process.”

Rite Aid Could Face ‘Struggle’

Adam Fein, Ph.D., president of Pembroke Consulting, Inc. and author of the Drug Channels blog, said he “will double down and predict that the FTC will approve the revised transaction.”

However, he wrote in a June 30 blog posting, “this transaction is a disappointing final act for Rite Aid’s long quest to become a national chain….Rite Aid will struggle to remain relevant in a pharmacy industry that favors both large chains and smaller, more nimble independents.”

The impact on employer is less clear, however, according to Nadina Rosier, health and group benefits practice leader, pharmacy at Willis Towers Watson, “Given the dynamic and complex nature of the PBM marketplace and how employers make decisions, it is difficult to predict how employers will view these changes in the PBM landscape.”

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