Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

As Walgreens Boots Alliance tries to convince investors that its $17.2 billion acquisition of rival pharmacy company Rite Aid is on track, it may need the deal more than ever. 

Walgreens beat earnings expectations for its third fiscal quarter on Wednesday, coming in at $1.18 a share compared with analysts' predictions of $1.14. The company also increased the low end of its full-year EPS guidance by 10 cents. 

But it's not all smooth sailing. Sales missed expectations. Growth in the U.S. pharmacy business, which accounts for 70.3 percent of total sales, came mostly from prescription drugs; retail sales grew just 0.1 percent. And that adjusted EPS beat came in large part from tax benefits that may not last. The longer the deal drama drags out, the more scrutiny will build on the underlying business. Shares were down 2.4 percent in afternoon trading.

Thumbs Down
Mixed third-quarter earnings sent Walgreens shares down on Wednesday
Source: Bloomberg
Intraday times are displayed in ET.

As the company turns itself into an international superpharmacy, it's had an unfortunate habit of failing to deliver on sales expectations. On Wednesday's earnings call, Baird analyst Eric Coldwell specifically called the company out for missing revenue consensus in all but three quarters over the past five years.

The company may be able to resolve that with greater transparency. And some turmoil is understandable after a leadership transition and the purchase of Alliance Boots in 2014, which added more than 4,000 international stores and a wholesale distributor. But the trend doesn't suggest a business that's booming as currently constructed. 

Bad Habit
Walgreens has an unfortunate tendency to miss sales expectations
Source: Bloomberg

One of the biggest drags? The wide swaths of Walgreens U.S. real estate devoted to selling milk, birthday cards and makeup. Pharmacy sales saved the day by growing 5.8 percent. But the company can't depend on perpetual prescription growth and needs to turn around its retail business and improve margins. It's planning significant investment in its offering of beauty products, but that hasn't showed up in results yet. 

Closing the Rite Aid deal would bring an immediate sales boost, add an extra billion dollars in potential synergies and add further scale to its most important business.

Drugged Up
Walgreens' growth in the U.S. has been dominated by prescription drugs as retail sales stay sluggish. Year-over-year quarterly sales growth.
Source: Bloomberg

As for the deal, CEO Stefano Pessina said on the call that he was "very confident" it would go through and that he expected the company would have to divest only 500 stores, not the as many as 1,000 it has said it is willing to shed. This worked to a certain extent; Rite Aid's shares jumped 2 percent after Wednesday's call.

But investors still seem to have concerns about the deal itself, increasingly aggressive regulators or both. The jump in Rite Aid's stock narrowed its discount to the deal price to 21 percent. That's down from 23.2 percent on Tuesday, the biggest gap since the deal was announced last October, but still hefty. 

Deal Doubts
Walgreens expects its buyout of Rite Aid will go through by December, but investors aren't so sure
Source: Bloomberg

Walgreens has limited alternatives on the pharmacy side; no independent chain aside from the thoroughly unbuyable CVS approaches Rite Aid's size in the U.S. Pharmacy benefit manager Express Scripts, another oft-mentioned possible acquisition target, is a far heftier $48.4 billion mouthful that does not want to be eaten. Buybacks? Yawn.

The sooner that Walgreens can resolve its current limbo, the better. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at

To contact the editor responsible for this story:
Daniel Niemi at