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Walgreens Buys Stake in Kerr Drug

Zacks Equity Research

In a bid to boost its business in North Carolina, Walgreens (WAG) inked a definitive agreement to acquire certain assets of privately owned regional pharmacy chain Kerr Drug, including 76 retail drugstores and specialty pharmacy business. The acquisition also includes a distribution center.

Although the financial terms of the acquisition agreement remain undisclosed, Walgreens will take over Kerr Drug’s said business in an asset transaction. The company expects to close the acquisition by the end of 2013, subject to standard closing conditions and regulatory approval.

According to Walgreens, the acquisition will be immaterial to earnings per share in fiscal 2014. Meanwhile, the acquisition will seamlessly strengthen the company’s foothold in Southeastern U.S. as North Carolina (the market which Kerr Drug serves) represents one of the fastest growing markets in the country.

Kerr Drug’s specialty pharmacy and retail drugstores declared sales of $381 million in fiscal 2012. Walgreens and Kerr Drug will continue to conduct business separately until the closure of the acquisition. Additionally, Kerr Drug’s long-term care pharmacy business has been excluded from the acquisition deal.

While we look forward to the integration of the acquired business with Walgreens’ operations, Kerr Drug will continue to serve customers with its current brand name in the near term post-acquisition. As an industry forerunner, Walgreens is perfectly positioned to grow Kerr Drug’s market reach and improve patient access. The company also plans to reconstruct the role of community pharmacy services in the healthcare industry.

Of late, Walgreens has pursued acquisitions and deals to grow its business in the domestic market and abroad. The intent to takeover Kerr Drugs is another means to maintain its industry leadership among other retail drugstores in the U.S. Walgreens should generate more customer traffic as it looks to expanding its foothold in the lucrative North Carolina region that covers 15 metropolitan areas.  

The inclusion of Kerr Drug’s specialty pharmacy business in Walgreens’ operations is another upside. In the drug retail space, specialty pharmacy represents another high-growth avenue. The soaring demand for specialty pharmacy, especially in the ongoing decade, is likely to accelerate growth for the company.

Although Walgreens continues to face challenges in the U.S., the drugstore chain should benefit from demographic tailwinds and the generic wave in the pharmaceutical industry. Currently, the stock carries a Zacks Rank #3 (Hold).

While we remain on the sidelines for Walgreens, other drug retailers like Rite Aid Corporation (RAD), Herbalife Ltd. (HLF) and GNC Holdings Inc. (GNC) are worth considering. These stocks carry Zacks Rank #2 (Buy).

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