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WAG Strengthens on Kerr Drug Deal

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Walgreens Co. recently completed the acquisition of certain assets of privately owned regional pharmacy chain Kerr Drug, including 76 retail drugstores and specialty pharmacy business. The acquisition also includes a distribution center. However, financial terms of the acquisition agreement are yet to be disclosed.

Earlier in September, Walgreens had declared that the takeover will be immaterial to earnings per share in fiscal 2014. Meanwhile, the acquisition will seamlessly strengthen the company’s foothold in Southeastern U.S. as North Carolina (the market which Kerr Drug serves) represents one of the fastest growing markets in the country.

Kerr Drug’s specialty pharmacy and retail drugstores declared sales of $381 million in fiscal 2012. Walgreens and Kerr Drug conducted business separately prior to the closure of the acquisition. Moreover, Kerr Drug’s long-term care pharmacy business has been excluded from the acquisition deal.

Despite the integration of the acquired business of Kerr Drug with Walgreens’ operations, the former will continue to serve customers under its current brand name going forward. Walgreens also plans to reconstruct the role of community pharmacy services in the healthcare industry.

Of late, Walgreens has readily adopted the inorganic route to grow its business in the domestic market and abroad. The rationale to take over Kerr Drugs is another means to maintain the company’s industry leadership among other retail drugstores in the U.S. Walgreens should attempt to generate more customer traffic as it looks to consolidate its foothold in the lucrative North Carolina region that covers 15 metropolitan areas.

The inclusion of Kerr Drug’s specialty pharmacy business in Walgreens’ operations is another upside. In the drug retail space, specialty pharmacy represents a high-growth avenue. The soaring demand for specialty pharmacy, especially in the ongoing decade, is likely to accelerate growth for the company.

Although Walgreens continues to face challenges in the U.S., the drugstore chain should benefit from demographic tailwinds and the generic wave in the pharmaceutical industry. Currently, the stock carries a Zacks Rank #3 (Hold).

While we remain on the sidelines regarding Walgreens, other drug retailers like Rite Aid Corporation (RAD - Free Report) , Herbalife Ltd. (HLF - Free Report) and GNC Holdings Inc. (GNC - Free Report) are worth considering. While Rite Aid holds a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).

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