So by now, unless you’ve been under a rock for the last 24 hours, you have inevitably heard that Walgreens/Alliance (WAG) has entered into a strategic relationship with AmerisourceBergen (ABC). Many in the industry think the big stories are either the negative impact to Cardinal Health who lost the business, or that this whole move is a 180 from the go-direct message WAGs branded pharmaceutical purchasing team has been telling manufacturers since last summer, or even the volume win for ABC. Well, while these are modestly interesting components of the story, they are not the big impacts. As I spoke to analysts and our large clients today, Blue Fin Group was credited as being the only consulting firm in the industry that called the likelihood of this and after I walk through the implications, I’ll tell you how we called it.
1) First off, this will be MAJOR hit to the manufacturer landscape. WAG and ABC will go vertical (meaning go into self-manufacturing) on generics, private label and anything that resembles a commodity item including DME. On the surface and especially in the short term, it shouldn’t be a major impact to branded manufacturers, but eventually the combined organization will eventually start to develop their own lines of brands and use their market position to scale their success. ABC will look to leverage its position with World Courier to understand successful new spaces for product innovation.
2) The second impact is that this vertical integration play will have a ripple effect for the retailer landscape – other retailers that don’t go vertical will be at an economic disadvantage. It’s a bit much to explain on a blog, but with generics alone when you go vertical in a global/offshore play, there are major tax savings and positive impacts to how generics will be reimbursed. Net net as other retailers and distributors think it through, this may force other deeper partnerships to develop (think about McKesson (MCK) and CVS/Caremark and how MCK’s Northstar Generic label already works). Think of it like a game of musical chairs for really large players.
3) The third impact is how this will change the distribution landscape. I laughed when I read one analyst say that this validates the distributor efficiency. No, this validates scale. You need scale to vertically integrate. The real impact to the distribution segment is that Cardinal may suffer a bit from their lack of size and scale to afford their current infrastructure – NLC, A-frames, etc. And my guess is that Cardinal will not apply as much attention on Rx as they do medical device moving forward. If you haven’t noticed, they were already starting to do that anyway. I would watch for new models to arise from growing companies like H.D. Smith. There are some fundamental issues with the current flow of economics all the way through the channels and it is time for new models. Biologics manufacturers are calling for it pretty loudly.
4) Lastly is the whole view and approach to globalization and scale to best practices. As WAG and Alliance have already pointed out, there is no purchasing scale for brands. There is however sourcing scale for self-manufactured items. Both WAG and ABC’s management teams have been consistent on this topic. Now they have the scale and team to start pulling it off. There will be a focus ex-US as soon as possible – combined distribution and pharmacy in any country they can get into. My guess is 18-30 months out.
Now with that said, how did we call it? One of the BFG partners thought that WAG was too big to lose and that either MCK or ABC had to work to retain it. CAH wasn’t going to hold them, because this was not about basis points and CAH just upset WAG (our speculation) because they actively were trying to counter-detail the go-direct play. Then we recognized that WAG had not included their Specialty Division in the go-direct discussion and that they kept that business off the table and with ABC. Then we thought through the pragmatic likelihood of how pharmacies buy. Pharmacies buy cold-chain, CIIs and slow move (20/80s) indirectly because these items are difficult to cost-effectively self-distribute. So we thought that since ABC would become the likely back-up, there was an opportunity here if ABC really wanted to play it big. And given that this is Steve Collis’ first crack at the bat as a publicly traded CEO with big aspirations of real global (remember he outbid many others who wanted World Courier very badly) he would think big again. Then we factored that the Alliance integration is really about their ability to go vertical, which is what they have reaffirmed as they are positioning themselves as a “products” company. And lastly, with Jeff Berkowitz from WAG leading the charge on the Alliance integration, Jeff comes from the manufacturing world and knows products very well. To get into a products based company, you need scale. Ta-da.
In the end, this is a game-changing move for both companies. Smart. Strategic. And honestly, a leap-frogging event. Steve Collis and Greg Wasson should be very proud of themselves.