Stefano Pessina, the Italian billionaire you’ve never heard of, is reshaping the fast-evolving, global pipeline that determines whether your prescription drugs are in stock when you need them

May 20, 2013, 6:50 p.m. ET

Stefano Pessina, the Man Shaking Up U.S. Pharmacy Distribution

Head of Alliance Boots Says Partnership With Walgreen, AmeriSource Bergen Will Streamline System

By TIMOTHY W. MARTIN

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Stefano Pessina, the Italian billionaire you’ve never heard of, is reshaping the fast-evolving, global pipeline that determines whether your prescription drugs are in stock when you need them.

Mr. Pessina, who speaks fluent Italian, English and French, is the executive chairman of European pharmacy giant Alliance Boots GmbH. In the past four decades, he transformed his family’s fledgling Italian warehouse into a European drug retailing and wholesaling powerhouse by doing 150 “significant deals,” the biggest of which was taking the company private in a leveraged buyout, valued at $18.5 billion—still one of the largest ever.

Far from retiring, the 71-year-old has designs on America, where he thinks the U.S. health-care system, compared with Europe’s, is “quite rich, quite fat” and “not particularly efficient at all.”He set out to change that beginning last year by first selling nearly half of Switzerland-based Alliance Boots toWalgreen Co., WAG +0.28% giving the largest U.S. drugstore chain the option to buy it all by 2015.

Then in March, the two companies forged a partnership withAmerisourceBergen Corp., ABC -0.31%a pharmacy wholesaler, fully linking up the prescription-drug supply chains of Europe and the U.S. for the first time.

The partnership involves a distribution pact in which all three companies will buy both branded and generic drugs together on both sides of the Atlantic giving them unparalleled purchasing power and streamlining delivery logistics.

The arrangement also gives Alliance Boots and Walgreen the right to eventually buy an equity stake of as much as 25% in AmerisourceBergen by 2017, a deal that U.S. and international regulators cleared on Friday.

Mr. Pessina, who tries hard to avoid email and wears suits even in casual settings, is already the largest shareholder in both Alliance Boots and Walgreen. But he is also set to become AmerisourceBergen’s biggest shareholder within a few years, based on the March agreement.

“It’s an American dream come true,” says Mr. Pessina, in a phone interview, adding he has wanted to enter the U.S. market for a long time. While each company sees itself as an equal partner in this international alliance, Mr. Pessina will be the lynchpin holding it all together, due to his experience and relationships across the globe.

“Stefano sought out global relationships before anyone else did,” says AmerisourceBergen Chief Executive Steven Collis. “He has almost an encyclopedic knowledge of the businesses, their finances, their key strategies.”

In the U.S. pharmacy industry, Mr. Pessina and Alliance Boots remain pretty much a mystery despite the fact that the Swiss company had annual revenue of £22.4 billion and, through its 3,300 retail stores and a vast distribution system, with reach across Europe, the Middle East and Asia.

For the year ended in March, Alliance Boots net income rose 13% to £805 million ($1.2 billion) from £714 million, according to the annual report released Wednesday. Revenue declined 2.6% from the previous year’s £23 billion, the company said, in part due to a stronger British pound but also reflective of broader adoption of cheaper generic drugs and the sluggish European economy.

The Walgreen-AmerisourceBergen partnership takes its cue from Europe, where drug distribution is more closely integrated with retail networks. Walgreen and AmerisourceBergen represent the first major retailer-distributor partnership in the U.S. The goal of the combination is to extract lower drug prices with manufacturers and provide patients access to new drugs and a wider array of them, faster and more consistently.

For decades, the pipeline that supplied Americans with their prescription drugs remained about the same. Pharmaceutical companies made the drugs, sent them to big wholesalers, which then shipped them to retail drug stores. Robust profits kept everyone happy.

That started to change last decade, as widely used, blockbuster drugs like Lipitor started to be replaced with an influx of cheaper generics. That has tightened reimbursements from insurers and public payers, lowering payment for dispensing drugs—and forcing companies to look for ways to gain scale.

By having Walgreen align with AmerisourceBergen, the U.S. is seeing the first vertical integration between a retailer and distributor.

“This type of model is almost a requirement in today’s environment,” says David Galardi, a managing director at Apogenics Inc., a health-care consulting firm and a former AmerisourceBergen executive.

The retailer-distributor model is one that Mr. Pessina knows well. Alliance Boots was formed in 2006 when Mr. Pessina’s wholesaler, Alliance UniChem, merged with British pharmacy operator Boots Group PLC. Shortly after joining forces, Boots drug stores were supplied twice a day, not once, allowing them to control inventories but with fewer out-of-stocks.

It’s unclear whether AmerisourceBergen’s main rivals, Cardinal Health Inc.CAH +0.48% or McKesson Corp., MCK +0.97% will also look to align with a big drugstore chain. At an investor’s conference last week, Cardinal Chief Executive George Barrett said the industry was evolving from being one where “a wholesaler was a wholesaler and an insurer was an insurer … retailer was a retailer.”

He didn’t rule out a future alliance with a retail pharmacy. “There’s probably nothing we will not explore,” Mr. Barrett said, adding he felt “very good” about Cardinal’s current approach.

(Cardinal Health’s contract with Walgreen expires in August.)

Even with the recent string of deals, Mr. Pessina still has his eyes on the next deal. Alliance Boots and its two U.S. partners still have no significant presence in Latin America and could deepen in China, Africa and a host of other countries, he says.

“There are still a lot of things to do before we become really global,” he says.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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