Walgreens CEO hints at another supply chain deal

Walgreens Boots Alliance ($WAG) has been so pleased with its relationship with AmerisourceBergen ($ABC) that it might just look for another drug distributor with which to hook up. That was the suggestion made by Walgreens CEO Stefano Pessina this week.

In 2013, Walgreens took a minority share in AmerisourceBergen as part of a plan to lower its drug costs. But more opportunities are out there to consolidate in the supply chain space, Pessina told investors during a conference call this week, Bloomberg reports.

"The complex structure of delivering the medicines to the patients will have to be rationalized, and as a consequence it's easy to believe we will have additional synergies coming from M&A activities," Pessina said in a call with investors Bloomberg reported. "We want to be--as we have been in the past--at the forefront of changes and so if these needs for consolidation will be confirmed, we will try to be part of it."

The 10-year deal AmerisourceBergen struck with Walgreens and its partner Alliance Boots two years ago has also led to improved top and bottom lines for the drug distributor. AmerisourceBergen started handling branded drugs for the two chains last year and began picking up their generic drug distribution this year. Walgreens and Alliance Boots also worked the deal so they will take a minority stake in AmerisourceBergen, starting with 7%. Walgreens paid $6.7 billion in 2012 for nearly half of Alliance Boots, then paid another $15.3 billion last year for the rest of the EU retailer and drug distributor.

Many analysts have expected Walgreens would buy a pharmacy benefits manager, like competitors CVS ($CVS) and Rite Aid ($RAD) have. There was thinking that Walgreens would bid for Express Scripts ($ESRX), Bloomberg said. But Pessina's remarks to investors have some believing that another deal with a distributor is more likely in the cards.

"(T)hey're loving the deal they did with AmerisourceBergen and they're talking about enhancing the supply chain with M&A," Tony Scherrer, director of research at Seattle-based Smead Capital Management, told Bloomberg. "If they're doing that, then perhaps a Rite Aid deal would be less likely than what people had been thinking."

AmerisourceBergen has found a lot to like about the deal with Walgreens as well. In January, it reported that its revenue in the quarter ended Dec. 31 was $33.6 billion, up 15.1%, with $33 billion of that coming from its pharmaceutical distribution unit. Sales in its pharma distribution were up 15%, "due primarily to the onboarding of the new Walgreens generic pharmaceuticals business, as well as strong sales of products that treat hepatitis C," the company said at the time.

- read the Bloomberg story