Walgreens and Omnicare Play Switcheroo

You may have missed a small but quite intriguing pre-Labor day deal between Walgreens (NYSE:WAG) and Omnicare (NYSE:OCR) in which the two companies swapped some non-core businesses with each other. See Omnicare, Inc. and Walgreen Co. to Exchange Home Infusion and Long-Term Care Pharmacy Businesses.

Walgreens also picked up 18 ApothecaryRx pharmacies in five states last week, continuing its acquisitive retail growth strategy. See Walgreens Reaches Definitive Agreement with Graymark Healthcare to Acquire Assets of 18 ApothecaryRx Pharmacies in Five States.

These deals emphasize the consolidation trend that has been moving through the drug channels universe for the past few years. Both companies are exiting non-core businesses that were neither well-loved nor well-understood by the respective management teams. Just my $0.02, but Walgreens made the better deal because it adds another puzzle piece to its growing non-retail business. Omnicare merely bulks up in a core industry that it knows all too well.

WAITING FOR WALGREENS

Walgreens has assembled an impressive roster of non-retail dispensing channels to augment its industry-leading retail pharmacy position. Here’s an updated look at its drug distribution and dispensing footprint today compared with 11 years ago:

The home care/infusion business is a logical stepping stone for specialty pharmacy, the high-growth segment of the drug business. Work site pharmacies provide an opportunity to broaden the company’s reach for dispensing traditional drugs. Mail pharmacies round out its dispensing options with central fill efficiencies.

And yet…Walgreens has an amazing set of puzzle pieces, but has not been able to assemble them into a coherent future vision. The individual parts perform decently, but the company has little chance of ever being anointed as a Good-to-Great business anytime soon.

Questions for discussion: Where are the synergies among the diverse companies in its Walgreens Health Services segment? Whatever happened to its direct-to-payer strategy? Why is the company so far behind schedule with its Consumer Centric Retailing (CCR) efforts? What's up with the ongoing PR blunders? Remember its clueless reaction—and subsequent surrender—on discount generics, the mysterious departure of its previous CEO, or its ill-advised brouhaha with CVS Caremark (NYSE:CVS) in June?

OMNICARE ASSIMILATES

I have not written much about institutional pharmacy on Drug Channels because it represents a fairly small part of the industry—about 7% of equivalent scripts according to IMS.

The institutional pharmacy business operates as a hybrid of central-fill dispensing on behalf of individual patients combined with physical distribution on behalf of multiple patients located at a single site.

The customers—primarily long-term care facilities—are highly sensitive to service since third-party payers cover drug costs. As a result, local and regional competitors, including many independent pharmacies, can often outcompete the two large national players with individual customers. Alternate site Group Purchasing Organizations (GPOs) help to level the acquisition cost playing field for the smaller companies. Add in reimbursement pressure from Medicare Part D plans (PDPs) and increased scrutiny following January’s Justice Department indictment against Johnson & Johnson (NYSE:JNJ).

The result? An insatiable need for an ongoing and perhaps neverending acquisition program by industry leaders Omnicare (NYSE:OCR) and Pharmerica (NYSE:PMC). Kind of like the Borg.

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To my fellow readers who will be welcoming 5771 tonight: L'Shana Tovah!