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Walgreens Boots (WBA) Grows on New Pacts Amid Several Woes

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On Jul 5, we issued an updated research report on Walgreens Boots Alliance, Inc. (WBA - Free Report) . We are currently looking forward to the company’s Rite Aid store purchase, expected to benefit the company in the long run. The stock carries a Zacks Rank #3 (Hold).

Walgreens Boots reported better-than-expected third-quarter fiscal 2018 results. Solid pharmacy sales growth encourages us. Moreover, the company has been gaining from strategic tie-ups. We are also upbeat about Walgreens Boots’ alliance with Express Scripts, aiming to expand both companies’ existing group purchasing efforts.This latest pact is likely to improve Express Scripts’ supply chain, making medicines including biosimilars affordable and accessible to patients.

This apart, the Rite Aid deal seems to benefit Walgreens Boots in more ways than one. Accordingly, the collaboration allowed Rite Aid to buy generic drugs sourced through a Walgreens Boots’ affiliate at a cost equivalent to the company’s for about 10 years, which buoys optimism. Also, Rite Aid provides Walgreens Boots with certain transition services for up to three years post the deal closure.

The deal’s financial value is attractive. Post the transaction’s initial completion, synergies of $300 million are estimated to be realized within a span of four years. The amount will be derived, primarily from procurement, cost savings and other operational matters.

We are hopeful about Walgreen Boots’ global footprint expansion with its decision to acquire a 40% stake in Sinopharm Holding Guoda Drugstores, a subsidiary of China National Accord Medicines Corporation Ltd. On its culmination, this investment should add a strong impetus to Walgreens Boots’ worldwide retail pharmacy business. Notably, Shanghai-based GuoDa is a large national pharmacy chain in China.

However, Walgreens Boots faces headwinds in the form of fierce competition and tough industry conditions. Even though the company continues to reap benefits from its growth initiatives, major business tycoons are already advancing in pharmacy businesses, flaunting a fair market share.

Notably, a slowdown in generic introduction over the last few years has been affecting Walgreens Boots’ margins. Also, an escalated reimbursement pressure and generic drug cost inflation have been denting Walgreens Boots’ margins significantly.

In June 2018, Walgreens Boots sold a 30% interest in Chinese drug wholesaler Guangzhou Pharmaceuticals Corporation. The alliance was formed back in 2008 as an equal partnership between Guangzhou Pharmaceutical Co Ltd and legacy Alliance Boots. Although, this sell-off follows a lucrative cash return offer, its overall impact on the company’s business may induce an adverse impact.

Over the past three months, shares of Walgreens Boots have underperformed the industry. The stock has lost 1.7%, wider than the industry’s 1.4% gain.

Key Picks

Some better-ranked stocks in the broader medical space are Genomic Health (GHDX - Free Report) , Stryker Corporation (SYK - Free Report) and Integer Holdings Corporation (ITGR - Free Report) .

Genomic Health projects an earnings growth rate of 187.5% for the to-be-reported quarter. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Stryker has a projected long-term earnings growth rate of 9.7%. The stock carries a Zacks Rank #2 (Buy).

Integer Holdings has an expected long-term earnings growth rate of 15%. The stock holds a Zacks Rank of 2.

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