The best retail pharmacy operators aren’t content to sit back and wait for changes in health care delivery; they’re driving them. Walgreens and Alliance Boots gave a spectacular example of that mind-set last month when they formed a strategic partnership, which, if all goes well, will lead to a merger three years from now.

The best retail pharmacy operators aren’t content to sit back and wait for changes in health care delivery; they’re driving them. Walgreens and Alliance Boots gave a spectacular example of that mind-set last month when they formed a strategic partnership, which, if all goes well, will lead to a merger three years from now.

Under the terms of the transaction Walgreens will pay $6.7 billion in cash and stock for a 45% stake in the global pharmacy-led health and beauty group headquartered in London, whose interests include pharmaceutical distribution, retailing and manufacturing. In return, the Deerfield, Ill.–based company will gain access to global markets (an area until now shunned by American drug chains), enhanced purchasing power and considerable supply chain expertise. Together the two companies have more than 11,000 stores in a dozen nations; are the largest buyer of prescription medications and many other health care products in the world; and they control the biggest international pharmaceutical wholesale operation.

Walgreens and Alliance Boots have complementary strengths at retail. Each operates some of the finest drug stores anywhere. The companies will no doubt work closely together to refine store formats and merchandise presentations. For Walgreens customers the most noticeable change will be the availability of such Alliance Boots health and beauty brands as No7, Botanics and Boots Laboratories.

The more significant changes will come on the procurement and supply chain side of the business. The scale of the two companies’ operations — together they have annual sales of some $110 billion — will provide unprecedented leverage in negotiations with drug makers and other suppliers. That position will be augmented by Alliance Boots’ considerable product development and manufacturing capabilities, which extend to the generic pharmaceutical sector.

Perhaps the most interesting aspect of the partnership relates to drug distribution, an area where Walgreens is reportedly making plans to cut out the middleman and deal directly with suppliers.

"Alliance Health Care is, volume-wise, and also as a network, the largest [drug wholesale] company in the world, even though it is not the largest in terms of sales," says Stefano Pessina, executive chairman of Alliance Boots. "This ­experience could be useful to our friends at Walgreens."