Fitch: Dynamics of the Drug Channel are Changing

  Fitch: Dynamics of the Drug Channel are Changing

Business Wire

NEW YORK -- March 20, 2013

The first-time alignment of a U.S. drug distributor and a U.S. retail pharmacy
chain could begin to change the dynamics of the global drug channel, giving
certain companies a material leg up on competitors, according to Fitch
Ratings. Walgreen Co. and Alliance Boots GmbH agreed Tuesday to a new and
unique long-term relationship with AmerisourceBergen that we believe will
allow for greater generic profits and efficiencies in the intermediate and
longer term.

The new relationship includes an unprecedented distribution contract between
WAG and ABC. First, it is 10 years in length versus a typical 3 to 5 years
length. An extended contract underscores the interconnectedness ABC and WAG
are committing to. Under terms of the alignment, WAG can acquire up to 30%
ownership in ABC over the next four years via open-market purchases and
warrants ABC has issued to WAG.

Second, the agreement includes distribution of not only branded drugs, but
also generic and specialty drugs. Today, most of the largest retail and
mail-order pharmacies in the U.S., as well as some mass merchandisers with
pharmacy operations, source and distribute most generics and some specialty
drugs on their own. These players often self-distribute generics in order to
retain as much of the more favorable profit dynamics as possible.

Although the distribution of generics and specialty drugs generally produces
higher margins for drug distributors, we expect ABC's EBITDA margins to show
some compression in fiscal 2013 and 2014. This expectation is based on the
very low-margin nature of distributing branded drugs to a customer as large as
Walgreens, as well as to the fact that WAG will have unobstructed vision into
ABC's cost of generic products, courtesy of its joint venture with Alliance
Boots.

The generic procurement joint venture set up last October by Walgreens and
Alliance Boots, to which ABC will now be added, will represent three of the
largest purchasers of generic drugs in the world. As a result, the JV will
enjoy unmatched pricing power as the first global purchaser of
pharmaceuticals.

We expect the JV to drive improved profit margins for ABC on the sale of
generic drugs, especially on sales to non-WAG customers. This benefit will not
likely be fully realized immediately as the purchasing joint venture is in its
infancy.

The alignment also enforces our long-held view that the drug distribution
industry provides value and efficiency to its downstream customers, contrary
to speculation regarding backward integration among large pharmacies. Prime
vendor relationships among U.S. distributors and pharmacies and
fee-for-service contracts among U.S. distributors and branded pharmaceutical
manufacturers, which are largely missing in Europe, are essential to driving
this value and efficiency.

Looking ahead, partnerships are likely between ABC and Alliance Boots to enter
and/or grow international markets (e.g. Latin America, China), where
fee-for-service and prime vendor contracts could be established. In addition,
there is now additional opportunity for ABC to enhance its manufacturer
service offering globally. We also believe future globally reaching
relationships similar to this alignment are probable in the intermediate to
longer term.

For more information on this topic, please see our special report, "Navigating
the Drug Channel: Drug Distributors: A Deeper Dive," available at
www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit
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opinions expressed are those of Fitch Ratings.

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Contact:

Fitch Ratings
Jacob Bostwick, +1 312-368-3169
Associate Director
Corporate Finance, Healthcare
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
Fitch, Inc.
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New York, NY 10004
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