The Rexall pharmacy at the corner of Church Street and Front Street East in downtown Toronto on Sept. 5. The Globe and Mail first reported that Texas-based McKesson, a distribution giant in the pharmaceutical industry, was seeking a buyer for Rexall earlier this year.Fred Lum/The Globe and Mail
Rexall’s American owner has sold the pharmacy chain to Canadian private equity firm Birch Hill Equity Partners.
Texas-based McKesson Corp. announced the deal on Thursday, which includes 385 brick-and-mortar pharmacies as well as the Well.ca e-commerce site. Financial terms of the deal were not disclosed.
The Globe and Mail first reported that McKesson, a distribution giant in the pharmaceutical industry, was seeking a buyer for Rexall earlier this year.
McKesson began building its retail presence in Canada in 2008, when it bought 270 independently owned pharmacies in Quebec that operated under the Proxim and Proximed brands. In 2012, it then spent $920-million to acquire pharmacies operating under brands such as I.D.A. and Guardian Drugs from the Katz Group Canada Ltd. In 2016, McKesson bought Rexall from the Katz Group for $2.9-billion. It bought Well.ca the following year.
Eight years later, McKesson is prioritizing investments in the oncology and biopharma-services side of the business, which are growing, chief executive officer Brian Tyler said in a statement on Thursday. McKesson declined a request for an interview.
McKesson has sold other parts of its global business in recent years. In 2021, the company sold its European businesses in France, Italy, Ireland, Portugal, Belgium and Slovenia, and also its British business, which included LloydsPharmacy.
Nearly 2,300 independently operated pharmacies will continue to be part of McKesson’s retail division in Canada, including locations operating under the Guardian, I.D.A., Remedy’sRx, The Medicine Shoppe, Proxim and Uniprix banners.
Birch Hill is acquiring the chain at a time when the pharmacy business has been undergoing significant changes. In recent years, many provinces have expanded pharmacists’ scope of practice, allowing them to treat minor conditions such as urinary tract infections, rashes and pink eye, and in some cases to prescribe drugs.
Rexall’s largest competitor, Loblaw Cos. Ltd., has been experimenting with expanding some of its drugstore spaces to look more like clinics, and is planning to build more locations.
But the industry has also had its share of pressures, with inflation pushing up operational costs and pharmacist shortages in some parts of the country increasing the competition for qualified staff.
McKesson faced challenges shortly after it acquired Rexall, when Canada introduced new rules that slashed the prices of generic drugs, and some provinces hiked their minimum wages. Rexall shut down nearly 10 per cent of its 450 pharmacies in 2018 in response, and took a writedown.
The company has been working on improving the performance of the retail business in recent years, launching a loyalty program called Be Well in 2020, stocking more of the products sold on Well.ca in its stores, and dropping the Pharma Plus in-house brand.
But McKesson consistently focused on its Canadian drug-distribution business and underinvested in Rexall’s operations, including the loyalty program, according to a source who worked on the transaction. The Globe and Mail is not naming the source because they are not authorized to speak for the company.
Birch Hill plans to back the existing management teams at Rexall and Well.ca with increased spending on customer data and systems.
Shoppers Drug Mart is the market leader in customer loyalty programs, with approximately 16 million Canadians signed up for Loblaw’s PC Optimum accounts.
Rexall also competes with the Jean Coutu drugstores owned by grocer Metro Inc. Last year, Montreal-based Metro launched a loyalty program called Moi, which now has 2.5 million members.
Rexall is also expected to step up regional marketing campaigns under Birch Hill’s ownership. The retailer’s 400 stores are concentrated in Western Canada and Ontario. McKesson intends to continue its partnership with Rexall and Well.ca as a wholesale distribution supplier, according to the company.
Because McKesson specializes in pharmaceutical distribution, Rexall was not a natural fit in the company, said Mike Jaczko, a former retail pharmacy executive and now a portfolio manager at KJ Harrison Investors who consults with pharmacists on succession planning and selling their businesses.
“McKesson is in the wholesale business. That’s what they do best. Owning a drugstore chain and operating a drugstore chain, requires an entirely different skill set,” Mr. Jaczko said.
Pharmacies such as Guardian and I.D.A. that are part of the company’s banner program are very different, he added, because the company provides services to independent owners including marketing and acting as a buying group, while it is not exposed to operational risk.
Rexall’s new owners would benefit from recruiting more experienced pharmacy retail operators that could help it to improve performance in a tight market with deep-pocketed competitors. “There is a lot to fix there. But it does have potential,” he said.
Also on Thursday, McKesson forecast second-quarter profit below analysts’ estimates. The company’s stock price fell by nearly 10 per cent.
Birch Hill has invested in retail businesses in Canada before, including mattress-store chain Sleep Country, The Incredible Country Hardware Store, and Mastermind Toys.
The company partnered on a $370-million deal to take Sleep Country private in 2008. Sleep Country more than doubled its earnings over the next seven years before going public again in 2015.
The investment in Mastermind Toys was less successful. Last year, after years of losing money, the toy-store chain was granted protection from its creditors before liquidating some of its locations and selling the rest to Unity Acquisitions Inc., a company controlled by Canadian retail veteran Joe Mimran.
Birch Hill also has a history of acquiring unwanted divisions of larger businesses, an approach known in finance circles as carveouts. In 2017, for example, it acquired CCM Hockey from Adidas as the German sporting-goods company shifted its attention to shoes and clothing. Birch Hill is now attempting to sell CCM.
With a report from Tim Kiladze