Cystic Fibrosis Stake for Walgreen

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Walgreen co. (WAG) has been taking strategic steps to negate the impact of the initial contract loss with Express Scripts Holding Company (ESRX). Additionally, the company has been striving to win back the former Express Scripts clients and stimulate customers’ demand amid a challenging macroeconomic scenario. As part of this effort, it has entered into a gigantic $6.7 billion potential merger with a global international pharmacy-led health and beauty group, Alliance Boots, and had also acquired a regional drug pharmacy chain. Following this, Walgreen recently formed a new alliance with Cystic Fibrosis Services Inc. in order to penetrate the highly potent specialty pharmacy market.

This partnership, which was initiated in October and completed recently, gave Walgreen a significant ownership stake in Cystic Fibrosis Foundation Pharmacy LLC, the parent company of Cystic Fibrosis Services. It is a specialty pharmacy providing medications and treatment for cystic fibrosis, a severe genetic disease. This disease causes acute lung infections and premature death.

Financial terms of the deal were not disclosed. The transaction makes the companies joint owners of two businesses: CF Services, a specialty pharmacy for cystic fibrosis patients and Pharma Dynamics Inc., a provider of new product launch support and call center services for drug manufacturers. CF Services will continue to operate under its present name at its existing location in Bethesda, Maryland.

Cystic fibrosis is currently spreading at an alarming rate. According to recent data, 30,000 adults and children in the U.S. and 70,000 people globally are suffering from this killer disease. Further, data shows that 10 million people in the U.S. (one in 30) carry the defective cystic fibrosis gene. This reflects huge growth opportunity in the future market as well. Walgreen, with its 7,900 stores (including 180 hospital outpatient pharmacies), is optimistic that it would be able to offer value added services to the patients of this Cystic Fibrosis community.

The year 2012 has been challenging for Walgreen as it experienced lower sales owing to the loss of contract with Express Scripts, high unemployment levels and lower discretionary spending. Although, in July, Walgreen and Express Scripts entered into a new multi-year pharmacy network agreement, Walgreen’s ability to win-back its previous customers remains a concern. The company operates in a fiercely competitive market with players like Rite Aid Corporation (RAD) and CVS Caremark Corporation (CVS).

As a result, Walgreen is currently concentrating on several partnerships, acquisitions and strategic steps to drive growth.Significant among these is a 45% stake in Alliance Boots to become the world’s first pharmacy driven health and wellbeing retail.The company also has the option to attain 100% ownership over the next three years for an approximate value of $9.5 billion in cash and stock.

In September 2012, Walgreen launched a complete customer loyalty program, ‘Balance Rewards', which claims to be the largest consumer loyalty program in the U.S. In the same month, the company completed the acquisition of a mid-South U.S.-based regional drugstore chain from Stephen L. LaFrance Holdings Inc. We expect these new ventures to boost growth going forward. Nevertheless, it remains to be seen if these measures can neutralize the headwinds related to the Express Scripts contract.

Currently, Walgreen retains a Zacks #3 Rank (short-term Hold rating). We have a ‘Neutral’ recommendation on the stock over the long term.

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