Taking The Pill
Modern pharmacies upend corner drugstores
Many years have passed since the sight of a drugstore shopper walking down the street toting a purple plastic bag labeled “K&B” was commonplace. While the brand is well-remembered by its patrons, New Orleans’ own K&B drugstores have long since vanished, replaced by the company’s buyer, national drugstore chain Rite Aid.
The sale of the highly regarded local drugstore company in 1997 was part of a long-running trend that saw many popular independent retailers get scooped up by high-volume chains and discounters. Decades later, new trends are taking hold in the drugstore industry, and one of them has led to a giant buying one of its peers – or at least a big chunk of it.
Walgreens recently concluded a $4.4 billion deal to acquire about half of the Rite Aid company, encompassing nearly 2,000 Rite Aid stores. Walgreens, which owns more than 13,000 stores, has said it will close about 600 drugstores as it completes the acquisition during the next year. Most of the closings will be Rite Aid stores that operate within a mile of an existing Walgreens, the company said.
It is not yet known how many Louisiana Rite Aid stores may be taken out of commission or re-branded as a result of the deal. But it is safe to say that Rite Aid, which has nearly two dozen stores in the greater New Orleans area, could see its local presence diminished. Meanwhile, other forces continue to reshape the way that consumers shop for pharmacy services.
Before concluding its deal with Rite Aid, Walgreens was subjected to about two years of intense scrutiny by federal regulators who were concerned about the impact its proposed acquisition might have on competition. Walgreens at first had hoped to acquire the entire Rite Aid company and was willing to pay as much as $17 billion to do it. But the Federal Trade Commission, worried that the deal would leave the United States with just two major pharmacy chains – Walgreens and CVS Health Corp. – and they forced a scaling down of the deal.
Now, as Walgreens begins carrying out its smaller acquisition plan, a potential new twist in the highly competitive business has emerged, and it’s one that few outside observers saw coming.
In late October, reports surfaced that CVS had made a $66 billion bid to acquire Aetna, the nation’s third-largest health insurer. Should it come to fruition, the deal could trigger a seismic shift in the pharmacy industry. Even if a deal fails to materialize, the attempt sends clear signals about the future direction of the drugstore business.
In recent years, CVS has made waves in its industry by opening retail health clinics, called “Minute Clinics,” inside its stores, where it offers flu shots and other vaccinations, and direct treatment for minor injuries and illnesses. CVS even offers home infusion services and operates long-term care pharmacies.
CVS had also become one of the country’s largest pharmacy benefit management companies. PBMs are intermediaries that can negotiate with insurers and pharmaceutical companies on customer pricing, and having that capability has given CVS a competitive edge.
All of these services have helped CVS develop closer relationships with customers. Now, a deal with Aetna could give CVS a pathway to 44 million people who are insured by Aetna. The insurer might steer its customers to CVS to fill prescriptions. At the same time, a merger could help Aetna solidify its customer relationships. But looming above these potential changes is a still more powerful force.
A few months ago, this column examined the possibility that a sea change could be at hand in the grocery business due to aggressive expansion by a relatively new operator. Now, that same operator has set its sights on the pharmacy business.
Rumors have been swirling that online retailing behemoth Amazon, which recently made inroads in the grocery industry with its purchase of Whole Foods Co., may enter the prescription-drug business by opening an online pharmacy and maybe even acquiring its own PBM. The online sale of prescription drugs is not new, but the potential competition from an entity of Amazon’s size is enough to scare the wits out of more traditional pharmacies and insurers.
Whether or not a merger occurs between CVS and Aetna, pharmacies and insurers are sure to continue attempting to form tighter relationships that afford them greater control over customer pricing, and Amazon will likely muscle in as well. Customers may hope that all this will result in lower costs, but a Los Angeles Times reporter recently offered this warning.
Likening the merger rumors to the affiliations that have occurred among telecom giants that provide pay-television services, reporter David Lazarus raised, then answered, a question. “Has anyone’s pay-TV bill gone down?” he asked.
“Exactly,” he answered.
Age, drug costs drive pharmacy trends
Seniors fill 28 million prescriptions annually, more than double the number filled by adults younger than 64.
Almost 90 percent of Medicare Part D plans include preferred pharmacies, up from 7 percent just four years ago.
For big pharmacy chains, prescriptions account for nearly 70 percent of revenue.
Fewer than 4 percent of patients use specialty drugs, but those medications comprise more than a third of drug spending.