Walgreens Goes Global with Surprise Alliance Boots Acquisition

Five years ago in The British are Coming, I suggested that Drug Channels readers keep an eye on Alliance Boots. Looks like I was right about the outcome, but wrong about the timing.

This morning, Walgreen (NYSE:WAG) announced that it would pay $6.7 billion to purchase a 45% stake in Alliance Boots, with an option to buy the remaining 55% within 3 years. Here’s the official announcement: Walgreens and Alliance Boots Form Strategic Partnership to Create the First Global Pharmacy-Led, Health and Wellbeing Enterprise

Full details are still not out yet, but here’s some background on Alliance Boots along with initial thoughts on what the deal means for the industry.

WHO IS ALLIANCE BOOTS?

Alliance Boots was formed when Alliance Unichem, Europe's biggest drug wholesaler, merged with Boots, the UK's largest pharmacy retailer. In 2007, Alliance-Boots was taken private in a leveraged buyout financed by Kohlberg Kravis Roberts and led by Stefano Pessina, who was also the driving force behind Alliance-Unichem.

Mr. Pessina has made no secret of his desire to expand to the US. In March, he told the Financial Times:

“For us, being a global company is ... not wishful thinking, it’s a project.”

A few other fun facts:

• Alliance Unichem is Pfizer’s logistics partner for its UK direct-to-pharmacy strategy. Pfizer now pays a per-package logistics fee to Alliance to distribute its products to pharmacies, hospitals, and dispensing physicians in the UK. Customers are purchasing from Pfizer, even though Alliance Unichem handles ordering and fulfillment. See Behind the Scenes of Pfizer UK.
• Alliance has acquired wholesalers around the world, including major investments in China. (See Cardinal Gets to China First. )
• Boots-branded OTC products launched in North America in 2004 and currently sell in many chain retailers. In 2007, Alliance Boots formed a strategic alliance with Cardinal Health (CAH) to bring its Almus brand of generic drugs to the U.S. market, although I haven’t heard much about it since then.

BTW, McKesson has long been rumored to be looking at Alliance Boots for European expansion, especially since McKesson has so much cash overseas. Guess it will have to shop elsewhere.

WHAT IS WALGREENS THINKING?

On this morning’s 8:00 AM conference call, I heard lots of PR puffery about a "global health care platform." But there are clearly sensible reasons for manufacturers and others to be worried:

• The combined company will become the largest global purchaser of prescription drugs, both at retail and wholesale. The biggest purchasing synergies will come from joint global procurement of generic drugs.
• Alliance Unichem brings substantial wholesale capabilities, which will play into Walgreen's domestic brand-name drug sourcing strategies. Cardinal Health (NYSE: CAH) should be worried.
• Walgreens will benefit from Boot's brand-development and R&D capabilities.
• We'll see Boots-branded products in Walgreen's stores, and vice-versa.

On the other hand, given the debt involved, everyone can now stop yakking about a Walgreen-Rite Aid (NYSE: RAD) merger.

More to come as details emerge later today. Walgreens will host its quarterly earnings call at 10:00 AM.