Although pipeline revitalization for generics is expected to continue in the near future due to the ongoing patent cliff, profitability of the pharmacy industry may still be adversely affected by the consolidation among generic manufacturers. (Refer to recent merger and acquisition examples such as Actavis/Watson/Forest Laboratories, Sandoz/Fougera) To prepare for the drug acquisition cost battle and better position itself in an upcoming cost-leadership like competition, both leading pharmacy chains and pharmacy-benefit-managers (PBMs) started to collaborate with the big three pharmacy wholesalers by building buying joint venture for generics sourcing.

Walgreen started the M&A skirmish by acquiring Alliance boots (now called Walgreens Boots Alliance Development [WBAD]) and forming partnership with AmerisourceBergen Corporation (ABC) in a timely fashion. The Walgreens Boots Alliance Development (WBAD) joint venture will source generics for Walgreens and ABC, while ABC has the right to source generics and other products through WBAD. The outstanding buying power of WBAD-ABC is around $12 billion, and with such leverage, Walgreen is likely to get the lowest acquisition cost to win the price war in the pharmacy industry. In addition, Walgreens also gains the more robust distribution capability of one of the big three wholesalers, ABC.

By the end of 2013, CVS Caremark and Cardinal Health formed a 50/50 generic drug buying joint venture without noticeable change in each company’s current supply chain and distribution operations. Such combination has forged another mega generic purchasing power of around $10 billion. Unlike WBAD with its international business structure to be aligned, both CVS Caremark and Cardinal Health have their business focus primarily in the states, thus synergies between the two is likely to be easier due to lack of country-specific requirements for licensing, packaging and other factors.

Most recently, Rite aid has decided to join the existing mega buyer McKesson-Celesio by the end of 2014 summer. Rite aid has a generic buying power of $1.5 billion, which adds to the $11 billion poor of McKesson-Celesio, will form the biggest generic sourcing empire in the world. But unlike WBAD-ABC and CVS-Cardinal, McKesson obtains a more valuable sourcing position and generics will be sourced under McKesson’s OneStop Generics program.

The unanimous strategic alliance formation by leaders between the pharmacy and pharmacy wholesale industry highlighted one of the linchpins to dominate the pharmacy industry in future: enlarging procurement scale to prevail in the acquisition-cost-based competition. And now we already have three giants in this war: they are Godzilla, King Kong and Kaijus.