01/30/2012 05:12 EST | Updated 03/31/2012 05:12 EDT

McKesson, Target To Transform Canada Drug Store Industry

Two major U.S. companies are looking to establish a substantial presence in Canada's drug store market.

California-based health-care giant McKesson Corp. announced late Monday that it will pay $920 million to buy a big chunk of a retail network belonging to Edmonton pharmacy operator Katz Group of Canada.

And discount retailer Target said earlier Monday it plans to have pharmacies in its Canadian stores operated by independent pharmacists under a franchise model when it opens its doors next year in former Zellers locations.

In the bigger of the two developments, McKesson will gain control of 850 stores across Canada that operate mainly under the I.D.A. and Guardian brands. It's also buying Katz's franchise business, which provides services to 160 Medicine Shoppe outlets across the country.

McKesson has been the primary pharmaceutical distributor to both businesses for years.

"This transaction is the natural evolution of the strong partnership between two companies with a long-standing successful business relationship," said McKesson executive vice president Paul Julian.

Katz Group chairman Daryl Katz said the company has been seeking to sharpen its focus on its corporate Rexall brand.

"This transaction unlocks significant value through the sale of two outstanding but non-core businesses," Katz said in a statement.

Katz also announced Monday it's beefing up its Rexall brand by acquiring Dell Pharmacies, an 18-store chain in southern Ontario with about $70 million in annual sales.

The Dell stores will be integrated into the Rexall network, which includes about 400 Rexall and Pharma Plus outlets across Canada.

Meanwhile, U.S. discount retailer Target is looking for independent pharmacists to own and operate franchises within its Canadian stores, which open next year in dozens of former Zellers locations.

"We have worked hard to understand the Canadian health-care landscape and believe our unique pharmacy franchise model will greatly appeal to pharmacists while best serving the needs of patients in Canada," Target Canada president Tony Fisher said Monday.

He said the model provides pharmacists with an opportunity to grow a business "with no entry fees and the support of a national retailer."

The Minnesota-based company will be competing with Canadian pharmacy chains such as Jean Coutu (TSX:PJC.A) and Shopper's Drug Mart (TSX:SC), which are also trying to lure independent pharmacists.

Target, which is preparing to make its first move outside the U.S., said its new franchise model for the Canadian market is different from its approach in the United States, where it has a long history of operating pharmacies.

Target will begin its search for pharmacist franchise owners in March.

McKesson also operates drug store chains such as Proxim, Associated Retail Pharmacy and Family Health Care Pharmacy, which are owned and managed by pharmacists and supplied and aided by McKesson.

Through the deal, McKesson is getting a joint ownership interest in ProPharm's pharmacy software application.

The deal is expected to close in the first half of this year, assuming it passes regulatory hurdles.