March 2, 2016 / 2:06 PM / 2 years ago

UPDATE 3-McKesson to expand in Canada with Rexall Health buy

* Deal funded by mix of cash & debt

* Transaction to add to McKesson’s fiscal 2017 profit (Adds analyst comment, shares)

By Natalie Grover

March 2 (Reuters) - U.S. drug distributor McKesson Corp said it would buy drugstore chain Rexall Health from Katz Group for C$3 billion ($2.23 billion) to strengthen its position in Canada’s pharmaceutical supply chain.

The deal will give McKesson access to about 470 retail pharmacies, and help leverage its existing assets in the country, particularly in Ontario and Western Canada, the companies said.

This is the second acquisition announced by San Francisco-based McKesson in recent weeks. Late last month, it announced its plan to buy two privately held cancer care service providers for about $1.2 billion, to add muscle to its specialty health business.

The more than 150-year old McKesson, which also distributes drugs to CVS Health Corp, in January said its fiscal 2017 earnings would likely be hit by weak generic drug pricing and narrowed its profit forecast for 2016.

McKesson’s lucrative supply deal with Rite Aid Corp hangs in the balance after the drugstore chain Rite Aid agreed in October to be bought by Walgreens Boots Alliance Inc.

Walgreens sources its drugs from rival distributor AmerisourceBergen Corp.

Analysts have estimated that the Rite Aid contract is worth between $15 billion to $25 billion a year for McKesson, accounting for up to 15 percent of its annual revenue.

Leerink Partners analyst David Larsen said he had greater confidence that McKesson would come in at the high end of its fiscal 2017 earnings forecast, and that these acquisitions would help offset the likely roll-off of the Rite Aid contract in fiscal 2018.

The Rexall Health acquisition, which will be funded by a mix of cash and debt, is expected to close later this year and should modestly add to McKesson’s adjusted earnings in fiscal 2017.

McKesson shares were up about 3 percent at $161.14 on the New York Stock Exchange on Wednesday. ($1 = C$1.35) (Reporting by Natalie Grover in Bengaluru; Editing by Shounak Dasgupta)

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