Pharmacy company Walgreens Boots Alliance and insurer Humana are in talks to take ownership stakes in each other, according to a report from The Wall Street Journal.
Directly investing in each other would create a larger financial incentive to partner and work towards the other company’s success at a lower cost than a straight acquisition, with the added benefit of keeping individual brand identity.
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The report cautions that the discussions are preliminary and there are no guarantees that a deal will come together.
Regardless, the news is the latest in a line of moves within the healthcare industry to consolidate in the face of new entrants to market including tech giants like Apple, Google and the Amazon-J.P. Morgan-Berkshire Hathaway healthcare collaboration.
Two major recent examples include CVS Health’s $69 billion acquisition of insurer Aetna and Cigna’s $52 billion purchase of Express Scrips, both of which have received federal regulatory approval and are expected to close by the end of the year.
In the company’s earnings call earlier this month, Humana CEO hinted at establishing closer ties between the two companies, which are already working together on a pilot program putting senior-focused primary care centers in Walgreens stores located in Kansas City.
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“I think we have a great relationship with both Walmart and Walgreens and we’ll continue to build on that relationship. I suspect that we will do some other stores before we conclude on this particular offering as a result of the initial indication and the learnings from this. And I think being able to do a few more stores will also give us the confidence in being able to scale it,” Humana CEO Bruce Broussard said on the call.
The insurer’s partnerships with retailers with large physical footprints like Walgreens is a major part of the company’s shift toward being a pay-vidor and more closely integrating health plans and care delivery.
It’s a strategy being pursed by competitors like CVS Health through its Aetna acquisition and UnitedHealthcare’s Optum division, which is one of the top employers for primary care physicians.
However, it’s somewhat surprising that the partnership has escalated this quickly to potentially include ownership stakes, especially when considering recent comments from Walgreens executives at the Credit Suisse Healthcare Conference.
“As we look at any corporate activity, we’re extraordinarily financially disciplined and the economics as we stand today, with the relative multiples, make it difficult to see how it would be economically desirably transaction compared to four or five years ago,” said Gerald Gradwell, Walgreens senior vice president of investor relations, in response to a question about whether the company was looking to purchase a health plan.
“We’re not in a hurry to make a deal,” Walgreens executive vice president and CFO James Kehoe added at the event. “We won’t move if the relative valuations are in the wrong place.”
Still, the idea of ownership stakes may be more attractive for a company who believes that current valuations are too high for outright acquisition, but who have clearly stated that key to their corporate strategy is shifting their pharmacy locations to “health hub” model.
Rita Numerof, president of healthcare consultancy Numerof & Associates, said the potential deal is another sign of the industry’s growing trend of vertical integration and can help shore up both companies’ efforts to grow in the Medicare Advantage space.
“Walgreens has been looking to acquire an insurer for some time. Humana represents an attractive partner. Its largely Medicare Advantage book of business offers the opportunity to steer cost sensitive seniors to Walgreens and its large, growing clinical services footprint and pharmacies,” Numerof wrote in an email.
“Walgreens, in turn, can reinforce Humana’s position with its in-home services. To the extent that Medicare Advantage continues to grow in popularity among seniors, this is a winning, lucrative combination.”
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