BREAKING NEWS: Walgreens and ABC Sign a Big Deal

3/21/13 UPDATE: For more detailed analysis, please see Making Sense of ABC-Walgreens-Alliance Boots

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Remember all of those rumors and noise about Walgreens bypassing wholesalers and buying directly?

Never mind.

This morning, Walgreens (NYSE: WAG) announced a surprise 10-year supply deal with AmerisourceBergen (NYSE: ABC).

And in a move that should make everyone nervous: “Walgreens and Alliance Boots together have been granted rights to purchase an equity position in AmerisourceBergen.”

Highlights below. I’ll follow-up later this week as details become known.

Channel consolidation, thy name is Walgreens!

Here are the press releases:

• From WAG: Walgreens and Alliance Boots Announce Strategic, Long-Term Relationship with AmerisourceBergen

• From ABC: AmerisourceBergen Announces Strategic, Long-Term Relationship with Walgreens and Alliance Boots

Highlights:

• ABC will now be Walgreen’s primary pharmaceutical supplier, with a 10-year agreement that starts on September 1, 2013. (Bye-bye, direct purchasing initiative. Guess it was easier to buy agreements than negotiate them.)

• Total revenues for ABC will be $28 billion, because the deal includes the distribution of brand, generic, and specialty pharmaceuticals to Walgreen's retail stores, mail order and specialty pharmacies. (Translation: Cardinal is out completely.)

• Beginning in calendar year 2014, AmerisourceBergen will "increasingly assume the distribution of the generic products that Walgreens has historically self-distributed." (Wow!)

• ABC has "access to generic drugs and related pharmaceutical products through the Walgreens Boots Alliance Development joint venture." (So, ABC gets to share/contribute to the purchasing synergies? Bad time to be a generic drug manufacturer!)
  

• Over time, Walgreens and Alliance Boots will have the opportunity to add two directors to ABC's board. (Yikes!)

Intriguingly, Walgreens and Alliance Boots will take an equity stake in ABC. Per the press release:

“Walgreens and Alliance Boots together have been granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right to purchase up to 7 percent of the fully diluted equity of AmerisourceBergen in the open market. In addition, AmerisourceBergen has granted to Walgreens and Alliance Boots equity warrants exercisable for 16 percent in the aggregate of the fully diluted equity of AmerisourceBergen.”

And from the department of Supply Chain Irony (SCI): By owning a chunk of ABC, Walgreens will now be heavily invested in the primary brand-name wholesale supplier to Express Scripts, Walgreen's least favorite PBM! Quite a tangled web for anyone trying to make sense of the drug channel.