|[February 21, 2014]
Fitch: Drug Channel Aligns Further on McKesson-Rite Aid Deal
NEW YORK --(Business Wire)--
Rite Aid Corp.'s decision this week to expand its distribution agreement
with McKesson Corp. to include generic pharmaceuticals in addition to
branded drugs is in line with prevailing trends in the global drug
channel and in healthcare more broadly, according to Fitch Ratings. The
industry trend is toward partnerships, alignment and amassing scale to
cut costs in an increasingly constrained reimbursement environment.
McKesson could become the biggest beneficiary of increased generic
purchasing power among global drug channel participants, Fitch believes.
The drug distributor's deal with Rite Aid strengthens its position in
the increasingly important area of drug purchasing scale, particularly
After overcoming a few hurdles, McKesson closed its purchase of
approximately 75% of Celesio AG earlier this month. Increased scale from
that deal will allow McKesson to drive cost savings, particularly
related to generic drug sourcing, and future growth. The Rite Aid
agreement will further enhance McKesson's drug purchasing scale and will
allow Rite Aid to tap into the resulting cost savings.
Notably, unlike other drug channel participants that have largely become
parties to purchasing joint ventures (JVs), McKesson will not be forced
to share these cost savings with partners. Fitch estimates that
McKesson's generic drug purchasing power, including Celesio and Rite
Aid, will rival that of the JV among Walgreen Co., Alliance Boots GmbH
and AmerisourceBergen Corp. (ABC) in the next couple of years.
The forms and progress of business combinations and alignments in the
global drug channel have been diverse. But the search for cost savings
from increased purchasing scales is at the core of each relationship.
Joint ventures to date have included CVS Caremark Corp. and Cardinal
Health as well as Walgreen's and Alliance Boots, which teamed up in 2012
and added ABC last year. Walgreens and ABC also entered into a 10-year
comprehensive distribution agreement and agreed on provisions which
could allow for up to 30% equity ownership of ABC by Walgreens.
These developments raise questions for other drug channel participants.
CVS Caremark may ned to adjust its strategy now that its two largest
competitors employ a distributor for virtually all drug volumes. (CVS
stores are served by Cardinal; but its Caremark business is served by
McKesson.) Also, with distributors increasingly able to garner better
drug pricing, the purchasing JV among Express Scripts, Kroger and
Supervalu (Econdisc) comes into focus.
These developments could lead to other large pharmacy operators (i.e.
Walmart, Target (News - Alert), Safeway) deciding to join distributors' generic
programs. Walmart and Target are currently served by MCK, and Safeway by
CAH. It is still too early in the business combination cycle to draw a
In Fitch's view, comprehensive distribution agreements make the most
sense for retail drugstores, then for grocers/mass merchants, then for
mail-order pharmacies. Still, each sector could benefit from tapping
into better generic pricing derived from greater scale.
At the other end of the channel, generic drugmakers will likely feel
increasing pricing pressures from these growing drug purchasers. Smaller
and mid-sized generic firms will likely be most affected, possibly
leading to additional consolidation over the medium term. Though the
largest global generic drugmakers will be less affected, drug channel
consolidation is probably contributing to the firms' focus on bolstering
their presence in specialty and other branded drug development, such
Actavis plc's announcement this week to acquire specialty drugmaker
Forest Laboratories, Inc.
For more information on this topic, please see our "Navigating the Drug
Channel" report series, available at www.fitchratings.com
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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