Recently, Walgreen Co. (WAG) debriefed analysts about its strategic maneuvers and growth plans at the Deutsche Bank Healthcare Conference.
To begin with, management at Walgreens emphasized the expected benefits from its 10-year old deal with AmerisourceBergen Corporation (ABC). AmerisourceBergen will replace Walgreens’ current pharmaceutical distributor Cardinal Health (CAH) as the existing contract is set to expire in Aug 2013.
Walgreens’ three-pronged deal with AmerisourceBergen underlines a strategic collaboration, equity alignment and distribution agreement. While the company is riding the generic wave, the deal augments Walgreens’ generic buying capacity by a massive $3.5 billion. This long-term agreement with Walgreens is expected to create a kingpin in the prescription drug purchasing space.
Walgreens is a step closer to exercising its right to purchase a minority stake (of 7%) in AmerisourceBergen following the regulatory clearance. Although the equity alignment is exercisable up to 23%, Walgreens can obtain a maximum of 30% stake (maximum limit per agreement) in AmerisourceBergen if the latter continues its share buyback activity.
Following the reconciliation with Express Scripts Holding Company (ESRX), Walgreens is sanguine about increasing returns of customers from competitors. While sluggish front-end comparable store sales have been a cause of concern, Walgreens is optimistic about improving trends and customer traffic going forward.
With respect to long-term expectations, Walgreens continues to envisage synergies from Alliance Boots partnership to be between $100–$150 million in the first year and $1 billion by the end of 2016. Further, the accretive deal with AmerisourceBergen might lend some upside to Walgreens’ target.
Walgreens’ Balance Rewards loyalty program (launched Sep 2012) continues to gain traction and has recorded more than 70 million registrations to date. The company also discussed the ecommerce opportunities.
Nonetheless, Walgreens faces the headwinds of increased competition and tough industry conditions. While things are looking up for the company on the back of recent positive developments, the progress has been slow. Resultantly, we keep an eye on the ongoing developments and prefer to avoid this Zacks Rank #4 (Sell) stock.
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