Dive Brief:
- Rite Aid was granted interim court approval last week for a settlement with its largest pharmacy supplier, McKesson, that would resolve a dispute over their supply contract.
- “The settlement keeps Rite Aid’s pharmacies stocked and stores open for the duration of the chapter 11 cases, removes an existential risk to Rite Aid, and avoids the potential loss of up to 45,000 jobs,” the company said in court papers.
- The deal, according to Rite Aid, secures McKesson’s commitment to supply the drugstore retailer’s pharmacies throughout its Chapter 11 case. In exchange, Rite Aid will pay McKesson on seven-day terms, with bills on shipments getting “superpriority” status as an administrative expense claim in the bankruptcy process.
Dive Insight:
Rite Aid’s spat with McKesson is an extreme example of the careful risk-management dance suppliers and distressed companies do frequently leading up to and, often, after a bankruptcy filing.
A pressured retailer like Rite Aid needs product to continue drawing revenue, and often trade credit from suppliers to stay liquid. Suppliers need to make sales too, but they can also potentially lose millions in bankruptcy scenarios.
On Oct. 14 — the day before Rite Aid made a long-anticipated bankruptcy filing — McKesson told the retailer it was terminating their long-term supply agreement.
That was the beginning of a short legal fight that played out early in Rite Aid’s bankruptcy. Leading up to that day, the two had been in talks over their supply agreement for months as Rite Aid headed, ultimately, for restructuring. It wasn’t until hours before Rite Aid’s filing, on a Sunday, that McKesson agreed to ship products to its stores that Monday. And that was just a provisional agreement.
When Rite Aid filed for bankruptcy, it filed an adversary complaint against McKesson on the docket. The two parties started negotiating a settlement early into the case.
Had McKesson actually halted shipments of pharmaceuticals to Rite Aid’s stores, the damage would have been instantly disastrous for the retailer.
As Rite Aid explained in its motion to approve the settlement deal, the drug distributor shipped to Rite Aid on a just-in-time basis — some half a million individual inventory pieces per day on average. That means stores carry little inventory, and Rite Aid locations are dependent on McKesson’s weekly, and sometimes daily, shipments to fill prescriptions.
Rite Aid’s dependency on the distributor is stark. McKesson-supplied goods account for 98% of the dollar volume of Rite Aid’s prescription drugs and about 70% of the sales in its retail pharmacy business.
When Rite Aid filed for Chapter 11, McKesson was by far its largest unsecured creditor, with the retailer owing the company some $668 million in trade debt. But that figure is less than what Rite Aid paid McKesson for one average month in the previous fiscal year, meaning Rite Aid may well be an important revenue stream for the distributor as well as a risk.
If McKesson had stopped shipping product, the retailer said, “Within days, Rite Aid’s inventory of branded drugs would be depleted, and customers could no longer fill their prescriptions at their local Rite Aid pharmacy.”
Trying to find an alternative supplier or distributor would have taken six months or more, according to the company. And because Rite Aid operates in many rural and underserved areas, it is the only nearby option for many of its customers.
Rite Aid trumpeted the settlement as a way to keep its Chapter 11 on track as it looks to restructure and sell some of its assets. The alternative would have been to litigate McKesson’s attempt to terminate their supply agreement, which Rite Aid said “would have kicked off an expensive, contentious, and multi-month fight with McKesson” that could have dragged on its efforts to restructure in bankruptcy.
A final hearing on the settlement is slated for Nov. 9.
