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What's Next in Drugstore Deals


The Walgreens-Duane Reade deal may signal more consolidation ahead.

Drug store chains are quickly becoming the new go-to health-care source for many Americans. Not only are these national pharmacies cheap, but they're located on just about every other street corner -- there's a pharmacy within 2.36 miles of any US consumer according to the Association of Chain Drug Stores.

After this week, the sector has gotten a little bit smaller and could become smaller still as three companies emerge as the major players in the market, while an analyst ups the ante on another potential acquisition target.

Earlier this week, Walgreen Co. (WAG) bought the New York-based Duane Reade, which has the highest sales per square foot in the retail drugstore sector, in a deal worth $1.1 billion, including the assumption of debt. The merger is one of the top-10 pharmacy deals of the last 20 years, according Thomson Reuters.

Not only does the Duane Reade acquisition make Walgreens an even bigger presence in the drugstore sector (the company already has annual sales of $63 billion), but it's opened up speculation about further consolidation in the industry.

UBS analyst Neil Currie wrote in a report this week that Rite Aid (RAD) could be the next drug-store name to be swallowed by one of the three major drug retailers: Walgreens, CVS Caremark (CVS), and Walmart (WMT). "We think any of these operators could significantly enhance Rite Aid profit metrics and add meaningful synergies," he wrote. "Rite Aid is the last remaining major drug store asset in the US with meaningful exposure to dense urban markets."

These three big players are all trying to get a better handle on this market (4 billion prescriptions are filled each year according to the Wall Street Journal) and position themselves as the pharmacies of yesterday that were seen as family-friendly places where consumers received trusted health-care advice and services from a pharmacist that they knew well. The transition is underway, as health-care costs in the US continue to rise and many consumers are frustrated with the government's inability to enact any sort of change. According to a Booz & Company survey conducted in 2007, consumers ranked pharmacists as the most trusted source on information about pharmaceuticals, beating out even doctors and government officials.

The transition began in 2006 when Walmart began offering a slew of generic and over-the-counter drugs for only $4 per one-month supply. The program quickly caught on at other pharmacies. But the steps toward full-service pharmacies didn't stop with pricing -- many drug stores, including Duane Reade, offer walk-in health care with a doctor available on the spot and plenty of stores were the go-to place for flu vaccinations during this past cold and flu season.

Even Rite Aid's slogan is "With us, it's personal." So investors may want to consider jumping into Rite Aid before it gets acquired, and watch as companies like CVS become more significant to the health-care arena.
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