In its first full-year report since entering its landmark partnership with Walgreen Co., Alliance Boots said the companies are making "good progress" toward realizing joint synergies and laying the groundwork for a full merger.


Alliance Boots, full-year report, Stefano Pessina, Walgreens, AmerisourceBergen, Walgreens Boots Alliance Development, Ornella Barra, Alliance Santé Participations S.A., pharmacy wholesaler, pharmaceutical distributor, U.S. drug chain, health and beauty retailer, health care products, Nanjing Pharmaceutical, Guangzhou Pharmaceuticals, ANZAG, Mark Miller, William Blair & Co.








































































































































































































































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Alliance Boots: 'Good progress' with Walgreens

May 15th, 2013

LONDON – In its first full-year report since entering its landmark partnership with Walgreen Co., Alliance Boots said the companies are making "good progress" toward realizing joint synergies and laying the groundwork for a full merger.

The global health and beauty retailer and pharmacy wholesaler said Wednesday that for the year ended March 31, its trading profit rose 6.1% (7.4% in constant currency) to nearly £1.27 million. Total revenue dipped 2.6% to £22.4 billion but was up 0.6% in constant currency.

Underlying profit, after tax, climbed 12.7% year over year to £805 million, with the growth being almost all organic, according to Alliance Boots. Earnings before interest, taxes, depreciation and amortization (EBITDA) grew 4.5% (5.8% in constant currency) to £1.51 billion. The company said cash generated from operations was strong at about £1.65 million.

Sales in the Health & Beauty division, which includes retail pharmacy, rose 6.8% (7.4% in constant currency) to £865 million. In the United Kingdom, which accounts for most of Boots' sales, revenue increased 8.8% to £813 million.

Alliance Boots' Pharmaceutical Wholesale division saw sales advance 5.1% (8.2% in constant currency) to £435 million for the year.

"This has been a transformational year for Alliance Boots due to our exciting, new strategic partnership with Walgreens, which we are further strengthening by our recent joint agreement to partner with AmerisourceBergen," Stefano Pessina, executive chairman of Alliance Boots, said in a statement. "Against the backdrop of this major corporate activity, and the challenging conditions across our markets, we have again delivered a double-digit growth in underlying profit after tax. Our people are at the heart of everything we do, and it is through clear leadership combined with great teamwork that we have been able to deliver such consistently good results."

Alliance Boots and Walgreens announced their agreement last June. Under the two-step deal, Walgreens agreed to buy a 45% equity stake in Alliance Boots for $6.7 billion in cash and stock, with the option to buy the remaining 55% of the company about three years later for $9.5 billion in cash and stock.

Walgreens, the largest U.S. drug chain, completed the purchase of the 45% interest in Alliance Boots in early August. With the first part of the transaction done, Alliance Santé Participations S.A. — of which Pessina and Ornella Barra, chief executive officer of Alliance Boots' pharmacy wholesale unit, are directors and whose ultimate ownership is a family trust — has become Walgreens' largest shareholder.

"We continue to be confident about our prospects and ability to pursue profitable growth, organically, from our synergy programs and through international expansion."

— Stefano Pessina

As per the second part of the deal, Walgreens can exercise its option to acquire the remaining 55% of Alliance Boots during the six-month period starting Feb. 2, 2015. Walgreens and Alliance Boots executives have said that all indications are that the company will proceed with the second phase of the deal. At the end of October, Walgreens and Alliance Boots said they have set up a joint venture company for their strategic partnership.

"Since August 2012, good progress has been made towards delivering the joint synergy program, which we are on track to achieve," Alliance Boots reported Wednesday. "This includes the establishment of Walgreens Boots Alliance Development [GmbH], a new joint venture based in Bern, Switzerland, where a team formed from secondees from both companies is fully operational. Synergies achieved up until 31 March 2013 are in line with our expectations, reflecting the setup time and related costs required to establish the various work streams. Our share of synergies (net of direct costs) totaled approximately £14 million (before tax) across owned operations and the new joint venture."

In a research note Wednesday on Alliance Boots' 2012-13 annual report, William Blair & Co. analyst Mark Miller reported that top-line and underlying EBIT growth were modestly below the investment firm's expectations.

"However, total group profit was in line with our forecast, driven by lower interest expense from greater-than-expected debt paydown and a lower tax rate," Miller wrote. "Total group profit is the critical measure as it flows through Walgreens' income statement via the equity income line."

Synergies from the Walgreens partnership also remain on track, Miller noted.

"Alliance Boots indicated that synergies from its partnership with Walgreens are in
line with its expectations up to March 31. Its share of synergies was roughly $22 million pretax across owned operations and the new joint venture," he stated. "Through February, Walgreens had realized roughly $27 million of pretax synergies ($2 million in the fiscal first quarter, and $25 million in the fiscal second quarter). Both companies are sharing synergies 50-50, although differing accounting treatments could make comparisons difficult. The companies had expected $100 million to $150 million in combined synergies for year ending August 2013."

Alliance Boots and Walgreens brought their venture into a whole other dimension in mid-March, when they unveiled a long-term partnership with U.S. pharmaceutical distributor AmerisourceBergen Corp.

Under the first part of the deal, AmerisourceBergen and Walgreens plan to broaden their current relationship beyond the specialty items distributed by AmerisourceBergen to a 10-year primary distribution agreement for branded and generic drugs — which Alliance Boots noted will enable AmerisourceBergen to become the biggest U.S. drug wholesaler.

The second part of the agreement calls for AmerisourceBergen to access generics and related pharmaceuticals through the Walgreens Boots Alliance Development joint venture. In the third part of the deal, Walgreens and Alliance Boots gained rights to acquire a 23% minority equity stake in AmerisourceBergen, including the rights to buy up to 7% in the open market and warrants allocated equally for 16% in aggregate of its fully diluted equity.

"We continue to be confident about our prospects and ability to pursue profitable growth, organically, from our synergy programs and through international expansion," Pessina stated Wednesday. "In a world where globalization is increasing at a pace, our transformational partnerships put us together in a unique position to become the clear world leader in both pharmacy and pharmaceutical wholesale. I truly believe that we have the brands, intellectual capital and, most importantly, the management expertise to create value for our stakeholders across the world for many years ahead."

On Wednesday, Alliance Boots also gave a recap of other global expansion initiatives that provided a glimpse of the strong growth potential of the partnerships with Walgreens and AmerisourceBergen.

In September, Alliance Boots announced a partnership with Nanjing Pharmaceutical, with an intention to acquire a 12% stake in the business. Nanjing Pharmaceutical is a leading regional pharmaceutical wholesaler in eastern China and is one of the nation's largest national wholesalers. Alliance Boots' current joint venture in China, Guangzhou Pharmaceuticals Corp., has a strong presence in southern China, the company said.

And in January, Alliance Boots gained full ownership of the shares in ANZAG, its German pharmaceutical wholesaling subsidiary. The unit has been rebranded as Alliance Healthcare Deutschland.

Overall, Alliance Boots has a presence in more than 25 countries. It operates 3,100-plus health and beauty retail stores, just over 3,000 of which have a pharmacy. The company's pharmaceutical wholesale businesses supply medicines, other health care products and related services to more than 170,000 pharmacies, doctors, health centers and hospitals from over 370 distribution centers in 20 countries. In addition, Alliance Boots has about 605 optical practices and 390 hearing care practices.

*Editor's Note: Article updated with analyst comment.

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