Walgreens, Alliance Boots and AmerisourceBergen help redefine economies of scale

Walgreens and Alliance Boots entered into a 10-year contract with wholesaler AmerisourceBergen on sourcing pharmaceuticals last week. But that's not all. Besides the long-term contract, Walgreens and Alliance Boots will have the option on a potential 23% equity stake in ABC in three years. 

The deal takes pharmaceutical buying leverage to the stratosphere and changes the face of more than one health service industry. As Adam Fein, president of Pembroke Consulting, noted in a live TV interview on  Fox Business' "Money With Melissa Francis": "Three of the largest companies in the pharmaceutical industry have come together and built the single largest buyer of prescription drugs in the world," he said.

Specifically, it creates a generic acquisition juggernaut. And that's important, Fein suggested, because by the time this deal becomes fully consummated in 2016, 90% of all medicines dispensed at the pharmacy will be generic medicines. That's not good news only for Walgreens and Alliance Boots; that's good news for anyone who chooses to buy their generics from ABC. The way the deal is structured, Fein noted in his blog on the deal, ABC will be able to leverage the collective buying power of Walgreens, Alliance Boots and every pharmacy customer who buys their generic drugs from ABC. 

But pharmaceutical acquisition isn't the only potential synergy here, especially when you factor in the equity stake. There's also the potential collective bargaining power of close to 12,000 retail pharmacy outlets, between Walgreens and ABC's Good Neighbor Pharmacy Provider Network, that can be leveraged against pharmacy benefit manager contracts. And with the addition of the independent GNP base, that combination makes for a pretty extensive health cost containment tool (think medication therapy management, disease state management, immunizations, nutrition counseling, smoking cessation programs) that can be tapped into by the national employers and health insurers that Walgreens has been regularly engaging. 

Both Fein and management consulting firm Blue Fin Group's Bill Roth see the next step for Walgreens and ABC is to go into self-manufacturing on "generics, private label and anything that resembles a commodity item including DME." Roth goes on to suggest that other retailers will be forced into vertical integration. "Net net as other retailers and distributors think it through, this may force other deeper partnerships to develop. … Think of it like a game of musical chairs for really large players."