5 Things to Know About the Walgreens-Rite Aid Deal

Highlights from this week's news about the big transaction between 2 retail pharmacy giants.

On Tuesday, the international company that owns Walgreens agreed to buy Rite Aid for $17.2 billion, which would take the number of national US retail drug chains from 3 to 2. The new entity would have about 12,700 stores, far ahead of CVS, which has about 7800.

The deal continues this year’s wave of healthcare mergers but has some scratching their heads. Does this even make sense for Walgreens, let alone consumers? Here are 5 things to know:

1. There will be plenty of scrutiny. The Federal Trade Commission (FTC) will be all over this transaction, and members of Congress from both parties are already sounding alarms. There’s concern that taking the nation’s retail drugstore business down to a duopoly will mean higher costs for consumers at a time when prescription drug prices are already a hot-button issue. Expect Walgreens to argue that it also competes with grocery stores, Target, and mail order pharmacies.

2. Dealing with drugmakers will be key. Most think the FTC’s perception of the deal will come down to what it believes will happen to drug prices at the consumer level. The loss of a chain may be offset by Walgreens’ increased ability to demand lower prices from drugmakers. Rite Aid’s recent purchase of the pharmacy benefit manager (PBM) Envision Pharmaceutical Services, or EnvisionRx, which operates a mail-order division, may prove crucial.

3. What’s in it for Walgreens? Other than taking out a competitor and increased size, analysts are asking this, too. While a press release from Walgreens promises “synergies in excess of $1 billion,” others note that Walgreens agreed to pay $9 a share for Rite Aid in cash plus acquire its considerable debt, even though Rite Aid’s store traffic has struggled in recent years. Walgreens’ motivation appears to be gaining more overall market share, so that it has more clout when it’s time to set prices with drug companies. While CVS has fewer stores, with its PBM presence it has 58.1% of market revenues, compared with Walgreens’ 31% and Rite Aid’s 10.3%.

4. Will stores close? Some say yes. Walgreens has said it will retain the Rite Aid brand initially, but it will weigh its options for the long haul. Credit Suisse has estimated the FTC may force the sale of between 150 and 400 stores in markets where there is significant overlap, and that may prove challenging because there isn’t an obvious buyer who could compete with a bigger Walgreens and CVS across the entire country. This could require Walgreens to deal with multiple regional buyers in different markets. When Rite Aid bought 1800 Brooks and Eckerd pharmacies in 2007, the agency forced the sale of 23 stores.

5. Why is this happening now? The Affordable Care Act (ACA) is designed to squeeze healthcare margins as tightly as possible, so mergers are happening everywhere, both to find savings and to give the bigger entities negotiating power. This week’s retail pharmacy merger is part of the bigger wave that earlier this year brought the announcement of the planned Aetna-Humana and Anthem-Cigna mergers in managed care (both transactions await regulatory approval). Consumer watchdogs fear these mega-deals could counteract some of the effects of the ACA and drive prices up again.