Walgreen (WAG), one of the largest retail pharmacy chains in the US, has decided to sell its pharmacy benefit management (PBM) business to Catalyst Health (CHSI) for $525 million in cash. The transaction, expected to close by the end of June 2011, is subject to regulatory clearances. Walgreen anticipates the deal to be EPS-neutral in fiscal 2012.
The company will provide certain services to ensure smooth transition of the patients covered under the PBM business, which will cost around $40 million. Walgreen expects that the one-time gain associated with the deal will offset the effects of transition or associated one-time cost in the current fiscal.
Subsequent to this deal, Walgreen will be able to better focus on its 7,700 drug stores. On the other hand, through this transaction Catalyst Health will expand its PBM business and raise its membership to more than 18 million from the current level of 7 million.
The deal once again rekindles the debate on whether it makes sense for a drug store to have its own PBM business or not. This dispute came to the forefront in 2007 with the acquisition of Caremark by the retail drug store operator CVS resulting in CVS Caremark Corporation (CVS).
However, for the past few quarters, the PBM business of CVS has been recording decline in revenues. It is presumed that the combination of drug stores and PBM creates a conflict of interest as the former aims at higher revenues while the latter concentrates on cost reduction.
Walgreen’s strategy of store expansion coupled with operational acumen and fiscal conservatism has made the company a leader in the retail drug store industry. The company has reduced organic new store openings to 4.0%−4.5% in fiscal 2010 from 9% in 2008 and is targeting to reach the level of 2.5%-3.0% in fiscal 2011. This will have a positive impact on the company’s operating profit.
Walgreen’s first quarter fiscal 2011 result has been encouraging despite the current economic uncertainty, which is impacting discretionary spending and reimbursement issues. The company has made satisfactory progress with respect to the CCR rollout and achieving the targeted savings under the rewiring initiative. Moreover, Walgreen’s various steps to grab a share of the $40 billion immunization market are commendable.
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