Rite Aid Corporation (NYSE:RAD) has just announced that it’s acquiring Envision Pharmaceutical Services (EnvisionRX) for $2 billion in a mostly cash deal. The move will broaden Rite Aid’s reach in the pharmacy industry and RAD stock holders — who helped drive shares up 7% yesterday to near all-time highs — seem to think this is a good move.
But what does this really mean?
Envision Pharmaceutical Services is a pharmacy benefit management company founded in 2001. A PBM is an administrator of prescription drug programs that uses its network size (the number of members enrolled in their healthcare plans) to negotiate lower prescription drug prices from drug manufacturers and pharmacies.
Pharmacies partnering up with PBMs is not a new trend; in fact, Rite Aid is the last out of the three major drug store chains to make the move. In 2006, CVS Health Corp (NYSE:CVS) acquired Caremark. Walgreens Boots Alliance Inc (NYSE:WAG) actually had a PBM up until 2011, when it sold it off.
But is the price right? RAD is shelling out $2 billion, for a company that expects to post revenue of $5 billion and EBITDA of just $150 to $160 million in 2015. That certainly is not cheap, but considering the synergies that can be realized by the combined companies, the price doesn’t sound crazy. If Rite Aid’s EBITDA increases by $250 million in the coming years due to this acquisition, that would give Envision an 8x multiple — not cheap, but not overly expensive either.
How are they going to get that $250 million in EBITDA?
Now with its own PBM, Rite Aid could see lower costs for the drugs it sells in its stores, which could translate into more foot traffic and/or better profits.
At the end of the day, most consumers don’t really care where they fill their prescriptions — they simply go to were their medical benefits plan tells them it will be the cheapest. Once that happens and enrollees are in Rite Aid’s system, the switching costs of moving to a new pharmacy should be enough to keep customers coming back month after month.
Another benefit of owning a PBM is that Envision will also be able to increase foot traffic by pushing plan enrollees to fill their prescriptions at Rite Aid locations since it will be, in most cases, considered an in-network pharmacy. That again translates to lower prices for the customer, which the competition, Walgreen’s, CVS or even Wal-Mart Stores, Inc. (NYSE:WMT) can’t match.
With Rite Aid currently being the third-largest drug store chain nationwide with 4,569 stores, this acquisition certainly positions the company to increase its presence within the industry in a short period of time.
Last quarter, Rite Aid’s pharmacy business accounted for 70% of its revenue after same store prescription count increased by 4.5%. That will be one figure investors should watch once this transaction closes, as it will be a great indication of whether or not the acquisition increased Rite Aid’s share of the drug business and its overall ability to survive in such a competitive industry.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities.