Walgreens-Rite Aid Deal to Draw Scrutiny

Walgreens-Rite Aid Deal to Draw Scrutiny

Washington — Walgreens Boots Alliance Inc.’s deal to acquire Rite Aid Corp. is expected to draw antitrust scrutiny not only because the company would grow to 12,700 locations, but because of what goes on behind the scenes with drug payments.

Antitrust experts say the Federal Trade Commission, which is likely to review the transaction, will look closely at whether the merging of the No. 1 and No. 3 pharmacy chains in the United States will lead to higher prices for prescription drugs. The FTC has taken an aggressive stance against consolidation in the health care sector, particularly with hospital mergers.

One issue is whether an enlarged Walgreens would set off a chain reaction that could lead to higher insurance premiums for consumers, according to David Balto, a former FTC lawyer in Washington. By gaining Rite Aid’s customers, Walgreens could extract more revenue from pharmacy benefit managers, or PBMs, which administer drug benefits. The PBMs would likely pass the higher costs on to insurers, causing them to raise rates, Balto said.

“There is increasing concern about drug pricing and competition in distribution,” Balto said. “It’s the kind of thing that will get very serious attention.”

One challenge for Walgreens will be finding a buyer for divested stores that will satisfy the FTC. Analysts at Credit Suisse estimated Walgreens may have to sell as many as 400 locations to resolve concerns. With CVS Health Corp. at No. 2, and no significant No. 4, there isn’t an obvious big competitor that could take on a large group of stores and maintain competition, Balto said. CVS outlets will grow to more than 9,000 after it acquires pharmacies inside Target Corp.’s stores, but it will still be smaller than Walgreens after a Rite Aid tie-up.

Walgreens may be forced to find buyers in local markets, said Jonathan Palmer, an analyst at Bloomberg Intelligence in New York. There are about 70,000 pharmacies in the U.S., and the three biggest chains only control a third of the market, he said.

“There are a lot of smaller players out there, but they’re much, much smaller,” Palmer said. “It’ll be a lot of deals with a lot of different people.”

Lawrence White, an economics professor at New York University’s Stern School of Business, argues that sales to local buyers wouldn’t go far enough.

The FTC will want a buyer that can replace the branded competition that Rite Aid is providing, possibly a large regional pharmacy with aspirations of going national, he said.

“It would have to be a viable party who could really take those multiple hundreds of stores and turn them into something that looks like Rite Aid,” said White. “You’re losing the No. 3 player in an already pretty concentrated industry.”

Walgreens Chief Executive Officer Stefano Pessina declined to speculate on the number of stores that would need to be divested on a conference call with analysts Wednesday.

The FTC will probably pay particular attention to customers without insurance who pay cash for prescription medications, according to Palmer. Those customers are more vulnerable to price increases, unlike insured customers who are only responsible for a co-pay.

In 2007, the FTC challenged Rite Aid’s acquisition of about 1,800 Brooks and Eckerd pharmacies from Jean Coutu Group, saying the deal threatened to raise prices for pharmacy services for cash-paying customers. The agency required the sale of 23 pharmacies to settle the case.

While Walgreens, based in Deerfield, Ill., has stores in every state, Rite Aid is more scattered, with no locations in populous states like Florida and Illinois and heavier concentrations in the Northeast and on the West Coast. In some regions, they have stores in close proximity. Their outlets at the intersection of Broadway and 14th Street in Oakland, Calif., for instance, are located right across from each other.

Given these pockets of concentration, the FTC will probably review the approximately $9.4 billion deal market-by-market instead of on a national basis, since CVS, Walgreens, Wal-Mart and Rite Aid together control only about half of the U.S. retail pharmacy market, according to FBR & Co., an Arlington, Va.-based investment bank. The rest is held by independent stores, smaller chains and mail-order companies. Walgreens is likely to sell or shutter some stores, FBR analyst Steven Halper said in a note Wednesday.

Author: David McLaughlin Bloomberg News

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