Walgreen reminded of European risks with Celesio's flop

As Deerfield-based Walgreen Co. spends $6.7 billion on a foray into Europe, a small German online pharmacy offers a reminder about the potential pitfalls.

Ralf Daeinghaus sold his DocMorris online pharmacy to Celesio AG in 2007 for about $258 million, and the buyer set in motion an expansion plan to bring lower- cost drugs to more European consumers. Five years later, Celesio has written down the value of DocMorris to 40 million euros and put the business up for sale, stymied by laws against corporate ownership of drugstores.

With medical costs rising and Europes governments cutting spending amid the debt crisis, the idea of increased competition in health-care retailing should be more appealing than ever. Yet Daeinghauss entrepreneurship ran up against the political clout of German pharmacists and European opposition to a freer market in medicine sales. Walgreen, the largest U.S. drugstore chain, bought 45 percent of Alliance Boots GmbH in August, with the option to buy the remainder.

Its really crazy, isnt it? Daeinghaus, 45, said as he sat in a coffee shop this month near his office in Dusseldorf. Its not a problem to liberalize the market a bit. When theres competition, there are price and quality improvements.

In Germany, Europes biggest market for pharmaceuticals, it is a problem. Each of the 27 European Union countries sets its own rules for pharmacies, and Germany, France and Italy have the most stringent. Under German law, an apotheke or drugstore must be owned by a pharmacist, and no pharmacist can own more than four stores, which must be located near each other. The government limits the profit margin pharmacists can earn.

In Germany the pharmacies have a very strong lobby, said Bjoern Weber, a research director for Planet Retail in Frankfurt. They are still seen in the public opinion as a guarantee against counterfeiting or getting the wrong product.

That means Deerfield, Illinois-based Walgreen, which is seeking to become a global pharmacy company, must steer clear of a big swath of Europe. Alliance Boots, based in Zug, Switzerland, operates 3,200 pharmacies in the U.K., Norway, Ireland, the Netherlands and Lithuania, and a wholesale business that supplies 170,000 outlets.

Much of Walgreens expansion in the region is limited, Ross Muken, an analyst at International Strategy & Investment Group in New York, said in an e-mail Oct. 10. The mom-and-pop pharmacies basically block the entry of large chains.

Alliance Boots has focused on areas with more open markets such as the U.K, and Walgreen may look to expand in eastern Europe, China and Brazil, said Muken, who has the equivalent of a sell recommendation on Walgreen shares.

Walgreen Chief Executive Officer Greg Wasson told analysts on a Sept. 28 conference call that Alliance Boots gives Walgreen the opportunity for expansion beyond the U.S. and Europe. Walgreen has an option to buy the remaining 55 percent of Alliance Boots over the next three years.

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Walgreen reminded of European risks with Celesio's flop