Walgreen's growth path
As we've noted before, three companies. Walgreen, CVS, and Rite-Aid dominate the retail drugstore trade in the US (in that order). It seems that an outlet from one of these three giants is at every major intersection across the United States. They've forced small, local pharmacies out of business; they forced #4 chain Eckerd out of business and split up its stores between Rite-Aid (mostly) and CVS.
So the problem is how these companies continue to grow? At this point, adding new stores is almost impossible except in a few markets, as their coverage is just about ubiquitous. Global expansion is less probable, as the US model of delivering drugs to consumers doesn't translate very well. The only hope is some kind of vertical expansion. As generics get more important, the margins are going down. After all, it costs the same in terms of labor to fill a $10 prescription as it does a $70 one. And there is also the serious competition of Wal-Mart, which has lowered prices and a big move to providing generics.
For CVS, the big move was the purchase of pharmacy benefits manager (PBM) Caremark, a move that got rid of a competitor as PBMs have been stealing customers form retail pharmacies. In addition, it gave CVS even more weight in opposition to the big drug companies.
For Walgreen, it is the recent acquisition of Option Care, a US specialist pharmacy/ health care center that focuses on a smaller range of higher-profit diseases, such as arthritis, hemophilia, Multiple sclerosis and cancer. Option Care doesn't just dispense pills; it also provides medical professionals to monitor the treatment and check on results. These treatments, in some cases, means provision of home delivery of drug treatments. For example, some drugs require infusion into the veins.
The Option Care buy was for $870 million, not a vast sum, but the largest buy in Walgreen's history, which has featured organic growth almost exclusively.
Option Care has a growing number of contracts with managed-care companies, so it acts as a bridge between retail pharmaceutical and the patient care industry. According to a Wall Street Journal story ("Option Care Deal Furthers Walgreen Health-Care Ambitions", 7/3/07) Walgreen "estimates the specialty-pharmacy and home-infusion-services market at $60 billion a year, with a projected annual growth rate of 20%." The story quotes the Walgreen CEO as asserting ""We want to get away from just being product-focused and more toward a health-care company."
It's not the first move into health care for the drug giants. Walgreen earlier this year bought Take Care Health Systems, a chain of 50 walk-in clinics, while CVS last year bought MinuteClinic, a chain of in-store walk-in clinics. And a Bloomberg report says that some are predicting US-based specialist pharmacy Omnicare (very similar to Option Care) may be the next in line to be bought.
The retail pharmaceutical business is mature. The big companies are under extreme pressure to keep up margins. So they are choosing to move upstream into the healthcare industry, looking for niches with higher margins and immature organization, one that fits with current expertise. A Boston Globe/Bloomberg story ("Walgreen purchasing Option Care", 7/3/07) quotes one analysts as saying. "We see this acquisition as a further example of drugstores taking advantage of their market positions and blurring channel boundaries to become more important healthcare companies."
But as with all vertical expansion, the customer is placed in an ambiguous position. Will the drugs administered and provided be slanted to fit the profit plans of a big pharmaceutical retailer? Will the healthcare providers be under pressure to make up for shortfalls in the retail business?
For Walgreen, will it be able to keep concentrating on its main (retail) business, as its sideline business is more fun and more profitable?
9:02:49 PM 
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