IHS Global Insight Perspective | |
Significance | Walgreens has entered into a deal with Catalyst Health Solutions (both US) selling its pharmacy benefits management (PBM) business unit in an all-cash deal. |
Implications | The decision will see Walgreens exit from the PBM business entirely and focus on the health and wellness services sector as well as its core pharmacy business. For Catalyst, the acquisition will increase its membership base to 18 million from 7 million. |
Outlook | The deal is set to close by the first half of the year. The transaction is expected to spark a debate on the business viability of a drug store chain which is also a PBM. With this deal, Catalyst races to compete with CVS Caremark, Medco Health Solutions, and Express Scripts in the PBM business. |
US firm Walgreens has entered into an agreement with compatriot Catalyst Health Solutions Inc. to sell its unit Walgreens Health Initiatives in an all-cash deal amounting to USD525 million. Walgreens Health Initiatives unit comprises of the firm's pharmacy benefit management (PBM) services. The transaction is expected to be completed by the end of June 2011, subject to customary conditions and regulatory clearances. The two firms also have a transition services agreement wherein Walgreens will provide certain services to Catalyst, primarily facilitating a smooth transition for existing members of the initiative. Walgreens said that the costs towards this would be about USD40 million and did not disclose any timeline for the services.
Walgreens said it expects to record a gain on the sale offsetting these transition services costs in the current fiscal year, and the transaction is to be neutral to earnings per share in fiscal year 2012.
Catalyst Benefits
Catalyst Health Solutions will see a range of benefits, primary the increase in membership in its PBM business from 7 million to 18 million. Also, the firm will provide PBM and related services for Walgreens' employee and retiree prescription drug plans. Other programmes, such as Walgreens Savings Club, are also to be served by Catalyst's new unit. Catalyst currently has its interests firmly entrenched in the prescription drug benefits business with its subsidiaries—namely, Catalyst Rx, a full-service PBM in the United States and Puerto Rico; HospiScript Services, one of the largest providers of PBM services to the hospice industry; and Immediate Pharmaceutical Services, a prescription mail service facility.
Outlook and Implications
The sale is significant as it embodies a definite change in strategy for the largest US drug store chain: namely, to exit the PBM business. In turn, Walgreens is to concentrate on its core activities in the pharmacy business and health and wellness solutions. The firm has 7,700 drug stores and will return its speciality pharmacy and mail service businesses. In contrast, the acquisition will see Catalyst Health Solutions Inc. move into the top tier of the PBM sector, competing with rivals such as CVS Caremark, Express Scripts, and Medco Health Solutions.
The sale has brought into focus a debate slowly brewing in the industry of keeping the drug store business and PBM services separate. Indeed, Walgreens' decision is in complete deference to its rival, CVS, which acquired Caremark in a landmark deal amounting to USD26 billion. The issue at hand is whether the two businesses can be provided with enough commercial focus as a combined firm, or whether it will thrive better as a standalone business unit. CVS Caremark has denied it is considering separating the two businesses (source: Wall Street Journal). But, following the Walgreens deal, industry watchers will be watch carefully to see whether there are larger benefits to keeping both businesses separate. It will not go unnoticed that a Federal Trade Commission anti-trust probe was launched soon after the CVS Caremark deal.