Changing the Game in Prescription Drugs: Walgreens and AmerisourceBergen

In March of this year, Walgreens and AmerisourceBergen announced a partnership to take over part of Walgreens prescription drug distribution. This partnership will give both companies a leverage in size and help them better compete in the already large industry. President Obama’s Affordable Care Act will extend health care coverage to a lot of people who previously did not have it. For the pharmaceutical industry, this means a lot, and companies will be fighting to keep prices low. “To win, companies must capture enough new volume to offset the effect of pricing pressure on profit margins” (Cahill).

The news of this merger is very relevant to Operations Management, because of the changes it will mean for Walgreens supply chain. Previously, Walgreens had used Cardinal Health Inc. for some of their distribution needs, but not nearly to the extent of the new AmerisourceBergen partnership. However, the contract Walgreens had with Cardinal is up in August, and they will be using this opportunity to change how they run their distribution. For Cardinal, their stock price has already been falling.

In a quote from Crain’s Chicago Business, author Joe Cahill sums up what this means for Walgreens supply chain: ”Walgreen’s agreement to buy $28 billion worth of drugs annually from AmerisourceBergen will pump more volume through the wholesaler’s distribution network, boosting asset utilization and profitability. At the same time, wholesale costs should fall as the bulked-up middleman leans on suppliers.”

One of the main reasons for the merger, besides the cost-cutting, is their new-found access to specialty drugs. The company that has been known for their bulk prescriptions, is now able to sell drugs for, “cancer, rheumatoid arthritis and multiple sclerosis, which have higher profit margins but are also more expensive to keep on hand” (Humer and Wohl). Previously, Walgreens was not able to supply all of these drugs because their delivery trucks came from Cardinal only once a week. Now Walgreeens will be receiving daily deliveries from AmerisourceBergen (Japsen).

This partnership does not only mean new things for Walgreens, but AmerisourceBergen as well. This contract will be worth $400 billion over the ten years that it is in effect. It is becoming increasingly more difficult for small companies to compete in this economy for this type of industry. This partnership really allows Amerisource Bergen to focus their efforts on, “generic and branded prescription drugs around the world” (Japsen). Being able to concentrate their efforts in specific areas, allows AmerisourceBergen for further cost-cutting

Thoughts for discussion:

Do you think rival CVS/Caremark will begin to change or rethink their distribution after this news?

What does this mean for other pharmaceutical companies? Are the industry giants, the only real players now?

Will other companies take note of Walgreens change in supply change?


11 thoughts on “Changing the Game in Prescription Drugs: Walgreens and AmerisourceBergen

  1. Wow, this is a huge move by Walgreens in an industry that is very lucrative though seeing a squeeze especially (like you note) politically. I had not heard of this strategic partnership before, though it definitely seems like a move in the right direction for both companies. It will definitely be difficult for smaller players to even compete with seeing these large conglomerates teaming up! I believe other companies will absolutely take note of this supply chain update by Walgreens. It will be interesting to see how Walgreens direct competitor CVS will react in the future.

    Other than the two main companies being discussed in this article I found this article very interesting due to its global economic affect for the industry. As it mentioned (more in-depth in the Forbes article attached with the sources), Cardinal Health a very large player in the game is going to be hit hard for them. Another interesting point of view would be Cardinal’s and I wonder what their game plan is going forward with them losing a relatively large client? Anyone have any thoughts on this?

    1. This is a great topic. When it comes to Obama Care everyone’s always talking about employers or insurance companies being hurt & what it means for them.

      It’s great that someone finally is bringing up the other half- the people actually providing care.

      Walgreens was smart to reprocess their system in anticipation of the shifting market and demands. Other companies should follow because their current process and design will be unsuitable and fall short.

      I think it’s also interesting to see how cardinal health will take this Luke the previous commenter said. Maybe this will be a chance for smaller companies to really find more specific and narrow focus to excel on and mass produce? I think it’s going to be a big topic soon!

  2. It’s interesting that a pharmaceutical giant like Walgreens has decided to switch it’s drug supplier. As you mentioned, this is a huge loss for Cardinal, and I expect that it will be difficult for them to make up for the loss of such a staple company. This is really good news for people who struggle to afford medication, hopefully with this new contract, they will see a noticeable decrease in prescription drug prices. To address one of your discussion points, I find it hard to imagine there is anyone who can compete with the industry giants in the pharmaceutical game. If we’re talking about drug companies, than a few of the smaller ones may still be able to succeed because of highly specialized products. But if we’re talking about drug stores; do mom and pop drug stores even exist anymore? And if they do, how can they compete with powerhouses like Walgreens, Walmart, CVS, etc…

  3. This plan will help Walgreen’s gain a competitive advantage which is a better supply chain. When Walgreen’s take action on this plan, competitors such as CVS will probably follow along to keep up with the competition. It will be hard to compete with the industry giants because they have the majority of the power in the market. There is still a chance for other companies to take over by differentiating themselves from other competitors.

  4. This is a great blog entry. As mentioned by one of the author’s discussion questions, this partnership will most likely force CVS/Caremark to act because Walgreens and AmerisourceBergen will have a substantial advantage in the industry. I am interested to see what CVS/Caremark will do in terms of the specialty drugs since that was the main reason for the partnership and is a major cut in costs.

  5. This is really interesting. I like the merger and I think it will be very successful for Walgreens and am happy to see the company grow even more than it already has. I think CVS/Caremark will try to do something similar to this to keep up with the competition and not lose customers to its rival. In an industry like this it’s hard to have a bunch of small successful pharmaceutical companies and it usually is the huge giant companies that overrule the industry. So I do feel like they will be the only real players now. I’m sure other companies will also notice what Walgreens has done and may try to do the same with their supply change.

  6. I think it’s great that Walgreens will be able to provide more medications at a lower price due to its new merger. Health care is a touchy subject in this country, and rightfully so because it affects so many people directly. I am unaware of the legality behind it, but it would be interesting to see if another pharmaceutical tycoon would partner with CVS and someone like Amazon to start a direct to your home prescription service.

  7. The strategy Walgreens is trying to implement is good. Personally, my family and I started to go to the Wal-Mart pharmacy for our prescription needs because we had to wait a couple of days to get a prescription that was out of stock or needed to order. With having daily deliveries, I wonder if Walgreens will be able to gain back some of the customers they already lost from Wal-Mart.

    To the comment above, insurance companies do offer direct mail prescription services. If you want standard shipping its free, but for expedited it cost additional money.

  8. Well as a Walgreens employee, who works directly in the pharmacy I must comment on this post. First, I will add that Walgreens does NOT receive weekly deliveries from Cardinal Health, it is a daily delivery. The biggest problem is that generic drugs cost sometimes 100% more to order through Cardinal than it does to order from our warehouse, due to the bulk purchasing that the warehouse does. Brand name drugs cost about the same. Generic drugs are delivered from warehouse twice a week. Walgreens bought a 45% stake in the British drug chain, Alliance-Boots.. not for their chain but because of their supply chain, AmerisourceBergen. It is the opinion of myself and other employees that Walgreens will exercise their right to buy the remaining % of the company. This in turn will make Walgreens not only a seller of prescription medication but they will be their own supplier which will send drug costs down tremendously while creating a higher profit margin. I cannot wait to see Walgreens destroy the competition. What I think will be funny is if CVS drops their contract with Cardinal (theirs is up in July) and sign with AmerisourceBergen.

  9. This might create huge monopoly. The contract, Yes, in theory it could cause lower prices but what keeps them from raising prices? There will be no one else to go to. One good thing for sure that is going to come out of this is job creation. But, I feel that it will be more reliable when it comes to deliveries and it might bring people back to Walgreens who have left because of delays or long holds as suhanip301s12 said.

  10. If what frankr said is true about Walgreens being able to provide their own supply, I do not see how any smaller pharmaceutical companies can even stand a chance against them. This switch in supplier is already going to allow Walgreens to cut their costs by a lot and push them ahead of their competitors. I believe they will wait to buy the rest of the supply company until the competitors find a way to respond to the price decrease that Walgreens will be able to provide. With all this being said, I am forced to agree with rmortha that Walgreens may become a monopoly and discourage competition. Hopefully other competitors will have a response and costs for pharmaceuticals will be reduced everywhere.

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