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Rite Aid’s health care assets offer options

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Investments made in recent years put Rite Aid in a better position to rebound from the terminated deal to be acquired by Walgreens Boots Alliance.

Rite Aid’s acquisitions of retail clinic operator RediClinic, health care management specialist Health Dialog and pharmacy benefit manager EnvisionRx give it more options as its leadership considers the company’s future with nearly 50% fewer drug stores following the cancellation of the Walgreens-Rite Aid merger.

Under a smaller deal with WBA, Rite Aid agreed to sell 2,186 stores, three distribution centers and related inventory for $5.175 billion. Rite Aid also entered into a transition services agreement of up to three years in which WBA will provide support for the stores until they convert to Walgreens systems. In addition, Rite Aid receives an option to buy pharmaceuticals from WBA’s group purchasing organization, Walgreens Boots Alliance Development GmbH, for up to 10 years.

Rite Aid said the proceeds from the new agreement, as well as a $325 million breakup fee, will enable the company to shed much of its debt load and bolster its balance sheet.

“While we’re disappointed that we cannot complete the proposed merger with WBA, we believe that this asset sale is an important strategic transformation for Rite Aid with numerous benefits,” chairman and CEO John Standley told analysts in a conference call on the new agreement with WBA. “The transaction will transform Rite Aid into a smaller but stronger company that will have less exposure to the pharmacy reimbursement rate pressures that have had such a negative impact on our business. We will also have a higher percentage of EBITDA contribution from our PBM EnvisionRx, which we think has the potential to grow at a faster pace than our retail business.”

John Standley_Rite Aid

John Standley

The 2,300-plus remaining stores will have stronger front-end sales, prescription count and operational results, and the company will benefit from more cost-effective drug procurement, according to Standley.

“This agreement will give us an opportunity to purchase generic drugs that are sourced through an affiliate of WBA at cost similar to that of Walgreens,” he said in the call. “This provides us an important tool to mitigate the reimbursement rate pressure that we expect to continue.”

With the smaller base of stores, the EnvisionRxOptions PBM subsidiary will account for an increased percentage of Rite Aid’s revenue. The pharmacy services segment represented $6.4 billion, or 19.5%, of Rite Aid’s total sales of $32.8 billion in fiscal 2017.

“What’s happening is the mix of our revenues is shifting between retail and PBM,” Standley explained to analysts. “And in that way, we’re — to some degree — reducing our reimbursement rate exposure as it relates to the pure retail play, and I think that’s a positive for us on a go-forward basis.”

EnvisionRxOptions encompasses diverse businesses. It provides PBM services through EnvisionRx (health plans and large commercial employers), MedTrakRx (small and midsize employers) and HospiceRx (hospice care providers). The unit also offers integrated mail-order, specialty and compounding pharmacy services through EnvisionPharmacies; DesignRx, the nation’s largest cash-pay infertility discount drug program; prescription discounts to uninsured and underinsured populations via EnvisionSavings; a claims adjudication software platform in LakerSoftware; and national Medicare Part D prescription drug plans through EnvisionInsurance.

Since Envision’s acquisition by Rite Aid in June 2015, a key offering that has emerged is Rx90. The program enables patients with chronic conditions to fill 90-day prescriptions at any Rite Aid pharmacy or, for the same price, have their medications delivered by the EnvisionPharmacies mail service. Walgreens and Costco have signed on to Rx90 as well, making it the nation’s largest 90-day retail prescription medication network, with more than 13,000 pharmacies.

Standley described Envision as a “fundamental and critical asset” for Rite Aid. “We think it has high growth prospects,” he said, adding, “we think there’s a lot more we can do as we look forward.”

Rite Aid also has kept up its investment in RediClinic, which is nearing the opening of its 100th clinic. RediClinic opened 21 locations in Rite Aid’s 2017 fiscal year. RediClinics are currently inside 63 Rite Aid stores in six states and in 36 H-E-B supermarkets in Texas.

“We have added retail clinics to stores, and we’re continuing to look at that business and think about how we want to use it in the future,” Standley said.

Executives already have been keen on the potential synergies presented by population health management, health care analytics and health coaching firm Health Dialog — particularly with the Envision PBM. Health Dialog was a linchpin of the Rite Aid Health Alliance, a program in which Rite Aid partnered with area health systems to support patients with chronic and polychronic conditions. Rite Aid pharmacists, in-store Health Dialog coaches and health network doctors worked as a care team to help these patients better manage their condition(s).

“We worked very hard to develop the Rite Aid Health Alliance, which has historically allowed us to partner with health care providers in the marketplaces that we compete in to provide additional services to chronic patients,” Standley said during the analyst call. “We’ve slowed that program down a little bit as we’ve come through this merger process here with Walgreens. But I think that’s something we’ll probably go back and revisit and think about how we might want to go forward.”

Rite Aid’s health care capabilities enable it to drive value in the marketplace, according to Standley. “We continue to talk to our PBM partners about services that we can provide in the pharmacy for patients that they would like us to focus on,” he said in the call. “So I think there’s lots that we can do with what we have to continue to drive down health care costs and expand the kinds of things that we can do in our store.”


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