Sept. 11--RALEIGH -- Walgreen Co. is acquiring the 76 North Carolina retail drugstores belonging to Kerr Drug, a Raleigh-based pharmacy chain that has been at the forefront of transforming the pharmacy into a health care service provider.
Walgreen, which is based in Deerfield, Ill., is also buying Kerr Drug's specialty pharmacy business and distribution center. Kerr Drug will keep its long-term-care pharmacy business.
The deal greatly expands Walgreen's presence in North Carolina, a fast-growing market where the company now operates about 200 Walgreens stores. In Kerr Drug, Walgreen is getting a company with a loyal customer base that is known for incubating ideas that have been widely adopted by much larger chains.
"They've done a lot of innovation in pharmacy service, and I think that matches up with our own strategy to transform the role that community pharmacy plays in health care," said Michael Polzin, a Walgreen spokesman.
The company doesn't expect many store closings as a result of the deal, Polzin said. Kerr Drug operates 19 stores in the greater Triangle area.
"At this stage, we anticipate that a significant majority of the Kerr stores will remain open," Polzin said. "As with most acquisitions, there will be some overlap, which could result in store closures."
Kerr Drug employs a little more than 2,000 people in the state, including fewer than 40 at its Raleigh headquarters.
"If there are any reductions, severance benefits would be provided to any jobs that are affected by the transaction," Polzin said. "We also expect that some positions will be available for Kerr associates at nearby Walgreens locations if there are store closures."
The acquisition is expected to close by the end of the year. Financial terms weren't disclosed. Last year, Kerr Drug's drugstores and specialty pharmacy business had sales of $381 million.
The Kerr Drug name won't go away immediately. Walgreen said that Kerr Drug will continue to operate under its own brand until a decision is made on how to integrate the drugstores with Walgreen operations.
Renowned for innovation
The original Kerr Drug store opened at Raleigh's Cameron Village in 1951. Owner Banks Kerr sold his stores to a subsidiary of J.C. Penney in 1995.
The name was resurrected when Anthony Civello, now the company's president and CEO, and others bought a bundle of stores from J.C. Penney in 1997. The Federal Trade Commission forced that sale, and Civello said he kept a promise to Banks Kerr to use the name.
Civello and his partners were executives from Pittsburgh-based Thrift Drug, a subsidiary of J.C. Penney, which had been buying up drugstore chains for years.
Within a year of taking the reins at Kerr, Civello formed a partnership with UNC-Chapel Hill in which pharmacy students worked as volunteers at a Kerr-based health center. There they learned how to explain dosages and side effects to patients, check blood pressure, and keep tabs on patients with chronic illnesses.
Kerr Drug expanded the model to Campbell University, and also set up a residency program for pharmacy students that was among the first of its kind. The company later opened stores with private rooms for counseling, health screenings and other health care products.
"We were really renowned in the industry for pharmacy innovation," said Diane Eliezer, Kerr Drug's director of marketing. "When we started this, pharmacists couldn't give flu shots."
But the changing health care landscape has made it more difficult for independent pharmacies and regional chains to compete. The profit pharmacies make on each prescription has been declining as reimbursement rates from both insurance companies and the government get thinner, said David Magee, an analyst with SunTrust Robinson Humphrey in Atlanta.
Smaller players also have less leverage when negotiating with pharmacy benefit managers, or PPMs, which administer prescription benefit programs.
"That's why it pays to have the size and sophistication in this space," Magee said. "They have the brand names, they have the relationships with the PPMs, they usually have really good real estate, and they have established advertising."
Positioning for the future
Although grocers and other non-drugstores have been adding pharmacy services in recent years, Magee predicts that giants like CVS and Walgreen will increase their market share in the coming years.
"At some point in time, I think you'll see less involvement by some of these non-drugstore players because the business has gotten too complicated and too costly," he said.
Walgreen is the nation's largest drugstore chain, with sales of $72 billion last year. The company operates 8,117 drugstores in the United States.
It also is a health care provider, operating 370 in-store clinics and more than 350 health and wellness centers on the campuses of large employers.
Magee said Walgreen, like its competitors, is positioning itself to benefit from the surge in insured patients that is expected to result from federal health care reform. That means becoming a low-cost and convenient provider of basic health care, one that improves a patient's overall health by doing more than just dispensing drugs.
Eliezer said Walgreen's efforts to expand the traditional role of the drugstore made it a good fit for Kerr Drug.
"Obviously, in this competitive environment, there are some things that you can't overcome," she said, "and so what you want to do is make the best judgment going forward with the best partner available."