TORONTO – McKesson Corp.’s $3 billion acquisition of drug chain Rexall will give the U.S. health-care services and technology giant a national retail store network with deeper pockets to battle Loblaw-owned Shoppers Drug Mart and will likely spur more consolidation in the sector, experts say.
The deal announced Wednesday gives Rexall’s long-time drug distributor the heft to expand more broadly into patient and health care services. It’s a budding area of growth for retail drug chains in Canada, where traditional pharmacies have seen their profits eroded from years of government reform aimed at reducing drug prices and lowering health care costs.
“This will be a space race between Shoppers Drug Mart and McKesson,” said Jim Danahy, CEO of Toronto-based retail advisory firm Customer Lab.
McKesson already had deep ties to Rexall as a drug distributor, and in 2012 the San Francisco-based company acquired more than 1,000 franchised stores under the I.D.A. and Guardian banners from Rexall’s owner, Edmonton-based Katz Group, for $920 million.
In response to years of government drug and health care policy reform, drug retailers such as Rexall and Shoppers have broadened their assortment of private label goods and introduced services such as flu shots and smoking cessation clinics.
“Canada’s healthcare environment is rapidly evolving,” said John Hammergren, McKesson’s chairman and CEO.
“It is marked by a move of primary care into pharmacy and increasingly complex patient demand. McKesson will bring together the strengths and expertise of our diverse portfolio to address challenges and opportunities in delivering the very best patient care.”
Danahy said the deal was not motivated by reducing costs or creating economies of scale, but “it is a radical acceleration of the pharmacy as the primary hub of community-based health care,” he said. “What’s huge here is the business growth potential in pharmaceutical services.”
Rexall and other pharmacies run diabetes and high blood pressure clinics for customers and also dispense flu shots, services for which pharmacies are compensated.
A practice known as “medication adherence” also represents a potential boon for pharmacies, Danahy said: managing prescriptions for an aging customer base and ensuring the drugs are taken properly.
Danahy said 62 per cent of Canadian seniors are on seven or more medications, and many of them are not filling their prescriptions regularly.
“The pharmacy will make buckets of money by filling the prescriptions that are going unfilled. Patients will come to expect more from their pharmacists.”
An acquisition of Rexall had been widely expected since Loblaw’s blockbuster $12.4 billion purchase of Shoppers in 2013.
Speculation heated up even more last May, when Rexall tapped former Shoppers Drug CEO Jurgen Schreiber to run Rexall Health, which controls its 470 retail stores, a group of family health-care clinics called Medicentres Canada, and Claimsecure, a health-care management and technology firm.
The acquisition will be funded by a mix of cash and debt and is expected to close late in calendar year 2016 and is subject to review under the Investment Canada Act and the Competition Bureau.
McKesson expects the acquisition will be “modestly accretive” to adjusted earnings per diluted share for fiscal 2017.
While industry observers knew Canadian companies such as grocery player Metro Inc. or Quebec-based pharmacy retailer Jean Coutu likely had strong motivations to scale-up their businesses through such an acquisition, a low dollar handicapped and likely ruled out most Canadian retail bidders.
“Canadian companies are cheap right now, that’s how it is,” said retailing consultant Ed Strapagiel. “It makes it that much more difficult for incumbent Canadian retailers to make a move.”
Jim Smerdon, vice-president and director of retail consulting at the real estate firm Colliers International in Vancouver, said there is a stepped-up incentive for U.S. companies to buy Canadian right now.
“They make money just on the currency,” he said.
Smerdon said it is unlikely consumers will notice any changes in the retail pharmacy landscape as a result, though he and Danahy speculated that Jean Coutu, which has 416 stores in Quebec and annual revenue of $2.8 billion, will likely feel competitive pressure from the two national retail giants in the future.
National Bank Financial estimates Rexall has annual sales of $2 billion to $2.5 billion and generates annual earnings before interest, taxes, depreciation and amortization of roughly $200 million to $250 million.
McKesson, which distributes drugs to the U.S. chains CVS and Rite Aid, has been bulking up its specialty health care business, last month announcing plans to buy two cancer care service providers for US$1.2 billion.
The company, whose shares have slid more than 30 per cent in the past year, said it would take a likely earnings hit from weak generic drug prices and said fiscal 2017 earnings would likely be affected.
Analysts have been concerned about the continued viability of McKesson’s supply deal with Rite Aid since last October, when Walgreens Boots Alliance Inc. announced a deal to buy Rite Aid. Walgreens sources drugs from a different distributor, AmerisourceBergen Corp.
Financial Post
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