Coverage: Will Walgreens-Rite Aid pass regulators?

Walgreens announced a $9.4 billion takeover of rival chain Rite-Aid, but the excitement from the merger has worn off and now many are questioning if regulators will approve the deal.

The antitrust question is a big one, especially since the two drug stores will have more than 12,000 stores nationwide once combined.

Hiroko Tabuchi of The New York Times explained how the CEO plans on facing antitrust questions:

Over his lifetime as a health industry magnate, Stefano Pessina says he has completed more than 1,000 acquisitions — and is now adding Rite Aid to his Walgreens-Boots empire.

And at 74, he is still not finished.

Though “consolidation is close to an end” in the United States, Mr. Pessina said in an interview on Wednesday, “we are still willing to make acquisitions in Europe or Asia or anywhere else.”

He added: “To be honest, if we’d had the opportunity to buy something somewhere else instead of buying Rite Aid, we’d have done it. But the U.S. market is just so important, so dynamic, so irrational and expensive. The need for consolidation, and the need for reducing costs, is much stronger here than in other parts of the world.”

Walgreens’s $9.4 billion purchase of Rite Aid, if approved by regulators looking at antitrust issues, would result in the biggest retail pharmacy chain in the United States, and in a global drugstore behemoth with estimated combined revenue of almost $150 billion.

The Federal Trade Commission could require the combined firm to divest itself of stores in some areas where their presence would amount to a monopoly, crushing competition.

But Mr. Pessina has been through antitrust battles before, navigating Walgreens through its acquisition of the European drugstore chain Alliance Boots, which has been followed by a series of store divestitures.

And analysts have said there is minimal overlap between Walgreens and Rite Aid stores in the United States — except in several markets in the Northeast and in California. The combined company would have 12,800 locations nationwide.

Sruthi Ramakrishnan and Diane Bartz of Reuters quoted antitrust lawyers who were skeptical of the merger:

The top two antitrust lawmakers in the U.S. Senate on Wednesday urged antitrust enforcers to give the plan careful scrutiny because of the importance of healthcare in the U.S. economy.

“I have fought tirelessly to promote competition in the health sector and I believe the proposed merger of two of the three largest drug store chains in the country raises serious issues,” Senator Amy Klobuchar, the top Democrat on the Senate Judiciary Committee’s antitrust subcommittee, said in a statement.

The subcommittee’s chair, Republican Senator Mike Lee, said he hoped antitrust agencies would “closely scrutinize” the deal.

Several analysts and antitrust lawyers said the deal would probably pass regulatory muster provided some stores were divested, especially in the northeastern United States, where Walgreens and Rite Aid stores overlap by more than 25 percent.

Walgreens shares closed down 10.7 percent on Wednesday. They had risen 7 percent on Tuesday after reports emerged that a deal was imminent.

Rite Aid shares, which rose 40 percent on Tuesday, fell 7.0 percent to $8.06.

Paul Ziobro of The Wall Street Journal compared the deal to CVS Pharmacy’s recent acquisition of Target’s pharmacies:

CVS, with about 7,800 locations, is also looking to expand its footprint. It recently announced a deal to buy Target Corp.’s more than 1,600 pharmacies for $1.9 billion, a transaction that is currently being reviewed by regulators.

The pharmacy industry hasn’t been able to use acquisitions to overcome the pressure on profit from lower reimbursement rates from health insurers and the federal government in the past several years. Walgreens’s margins in its U.S. pharmacy business fell to 26.9% for the year ended Aug. 31, from 28.2% a year earlier.

A combined Walgreens-Rite Aid, analysts said, could hold greater sway with pharmacy-benefit managers like CVS’s Caremark or Express Scripts Holding Co. that manage drug plans for corporations and the government. It would also make the company a top chain to include in any preferred networks, which are growing in popularity with corporations and individuals because of the lower costs.

“Does boosting your market share give you a lot more bargaining power against PBMs, government, payers? The answer is yes,” said Andrew Wolf, BB&T Capital Markets analyst. “That’s where the scrutiny will lie.”

Being a larger pharmacy chain wouldn’t necessarily give Walgreens a better position with PBMs, Mr. Pessina said. It could even be a disadvantage, he argued, since the PBMs could in turn demand even lower reimbursement rates because of access to even more customers. He also noted the large chunk of prescriptions filled through the mail gives physical drug chains less clout.