Walgreens Boots Alliance Back In the PBM Game andExpress Scripts Could Be It’s Next Target

Jefferies analyst Mark Wiltamuth weighed in on Walgreens Boosts Alliance, saying Rite Aid looks on track which brings PBM story back in focus. The analyst sees potential for an Express Scripts merger, which could be 12-14% accretive to Express Scripts, but may not come until 2018.

The analyst believes Rite Aid anti-trust hurdles will be cleared. “We believe the FTC will focus on local Rx market concentrations of 40% or more,” Wiltamuth commented. “We estimate that 27% of the markets for WBA+RAD are over this threshold. Divesting 780 stores pares back to the 40% level, which is comfortably within the 1000 store divestiture cap.”

Wiltamuth said merger synergies of $1B (and their estimate for $0.63 in EPS accretion by F19) are largely from overhead reductions and harmonizing of drug costs.

The analyst highlighted that PBMs still have the upper hand. “While the Walgreens US Rx market share will now rise from 19% to 26% and the top top 3 control 61%, we note that PBMs have already consolidated from 50% to 75% share for the top 3 players,” he said. “With the 2011 rate dispute between Walgreens and ESRX highlighting that PBMs have the upper hand, Walgreens’ increased scale does little to change power dynamics in the marketplace; Rx reimbursement rates should continue to fall.”

Walgreen is now back in the PBM business and a vertical integration could be next. “Walgreens expects the Rite AId EnvisionRx PBM business to be a “learning tool”, which we believe could pave the way for a bigger PBM deal,” the analyst commented. “We estimate that a merger with ESRX could be 12-14% EPS accretive, but it would require significant leverage (over 4x), we assume 50% equity financing and digestion of RAD could make investors wait until 2018.”

The firm maintained a Hold on WBA and cut its price target to $90.00 (from $95.00)

For an analyst ratings summary and ratings history on Walgreens Boosts Alliance click here. For more ratings news on Walgreens Boosts Alliance click here.

Shares of Walgreens Boosts Alliance closed at $82.56 yesterday.
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