News
Walgreens’ finances are in trouble — but all hope is not lost
What’s going on at Walgreens?
If you’re someone who’s been following the healthcare stock market over the past few years, there’s a good chance you’ve asked yourself this question. The Illinois-based pharmaceutical giant’s stock price decreased by 80% over the past five years — currently trading at around $11 per share, compared with around $56 in July 2019.
The company’s trademark red cursive “W” is becoming less and less ubiquitous on street corners across the country, too. During a earnings call On June 27, Walgreens CEO Tim Wentworth revealed plans to close a quarter of the company’s 8,600 U.S. stores by 2027.
In the three months ended May 31, the company’s revenue rose to $36.4 billion, up 2.6% from the same quarter last year. The company also reported net income of $344 million, up from $118 million during the same period in 2023. Walgreens’ revenue and profitability numbers may be better than they were a year ago, but there are strong headwinds in the U.S. pharmacy world.
The company’s near-term guidance doesn’t inspire much confidence — during an earnings call two weeks ago, the company further reduced its adjusted earnings per share to between $2.80 and $2.95 per share.
The company declined to provide answers to MedCity News’ questions about why the company’s stock price has fallen so dramatically and how it plans to recover, referring all comments to its earnings call two weeks ago.
Experts across the healthcare industry agree that while Walgreens is currently in a bleak financial situation, a recovery is still possible. For that to happen, the company will have to let go of its retail clinic dreams and focus more on making its core pharmacy business as efficient as possible. That journey appears to have already begun, given that Walgreens announced earlier this year that it will close 160 of its VillageMD primary care clinics.
Here’s how Stephanie Davis, senior equity research analyst at Barclayssummarized his opinion on the Walgreens situation.
“Looking ahead, while we think management is taking the right strategic steps in the U.S. healthcare sector (we believe VillageMD represents the largest drag margin in [Walgreens’] assets), we see a continued challenging macro backdrop and profitability headwinds in US retail pharmacies that are likely to cloud execution, supporting our [underweight or sell] assessment [on the stock],” she wrote in her equity research report following Walgreens’ recent quarterly earnings call.
Business issues in the front and back of the store
Walgreens is struggling with both front- and back-of-store issues, said Peter Axe, CEO of Walgreens. UpScript Healtha company that fills prescriptions online through telehealth visits.
“At the front of the store, theft has forced them to place products behind locked plastic covers, which requires calling an employee to open the lid for the customer. Staffing shortages and poor quality workmanship have made this an impossible business model — especially when there are companies like Amazon with readily available inventory that can deliver within a day, and sometimes within hours,” Axe explained.
He noted that the storefront is also being affected by supply chain issues and a high level of cost consciousness among consumers — two issues that have persisted since the pandemic.
In the back of the store, Walgreens is struggling with shrinking margins. Axe believes that’s attributable to pressure from lower-priced generics offered by companies like Mark Cuban’s Cost Plus Drugs, as well as the growing use of pharmacy discount cards like those offered by GoodRx.
He suggested that slow revenue growth will hurt Walgreens’ ability to invest in new technologies that could differentiate it from its competitors. Axe noted that there is a growing demand for pharmacists to act as care coordinators, meaning they have to spend a lot of time answering patients’ questions and giving health advice instead of filling prescriptions, thus hurting revenue.
“We graduate approximately 14,000 pharmacists annually, and the current demand is likely several times that number,” he said. “Dispensing pharmacies need to invest in innovative technologies and automation, but that requires capital. The current cost of capital will impact Walgreens’ ability to invest, reinvent and reconfigure stores.”
Have our retail healthcare dreams been dashed?
In 2021 and 2022, there was a good deal of excitement about how retail health clinics could increase access to care and create value in terms of better downstream outcomes and cost savings. That fundamental opportunity still remains, but execution has proven challenging, noted Rebecca Springer, lead private equity analyst at Presentation book.
“Building new primary care clinics is an extremely capital-intensive way to scale care delivery — that has always been the case, for all participants and not just retailers, but markets have become less forgiving,” she said.
Additionally, the benefits some envisioned for locating primary care in retail spaces haven’t materialized quickly enough, Springer pointed out. These include using pharmacists as part of the primary care team, engaging patients who otherwise weren’t engaged with the health care system, and utilizing consumer data to shape population health and care management strategy, she explained.
Walgreens isn’t the only one struggling to maintain its retail health efforts — Amazon threw in the towel in its hybrid primary and urgent care business for nearly two years, and CVS Health started to close dozens of its pharmacies in Target stores this year. Just two months ago, Walmart announced plans to to close all of its 51 primary care clinics, as well as its virtual care business.
Springer said she has her eye on Oak Street Health and One Medical, which she called “the last primary health care facilities standing.”
A leader in the traditional healthcare provider sector — John Couris, CEO of Tampa General Hospital — highlighted another important reason why retailers are struggling in the care delivery area.
“Healthcare providers benefit from deep discounts and other wholesale benefits due to high patient volume — retailers are unable to take advantage of this and therefore struggle to find profitability in this space,” Couris said.
He also noted that care coordination at retail clinics is often poor.
Let’s say a patient sees a retail healthcare provider in-clinic or via telemedicine, and then learns they need specialized care. The patient still has to find a doctor in a health system to provide that care, and when they do, their records often don’t follow them to their new provider’s EHR, Couris explained.
Basically, retail clinics don’t have much incentive to share data, so they often don’t. In Couris’ view, the retail aspect of the healthcare model perpetuates a major problem in the healthcare world: episodic, poorly connected care.
Will things start to improve with a new leader in charge?
To help your business recover, Walgreens welcome Wentworth as its new CEO in October, following the match of its former leader, Rosalind Brewer.
In his first seven months on the job, Wentworth appears to be focused on reshaping the cost structure of Walgreens’ business, said Keonhee Kim, a healthcare equity analyst at Morning Star.
This is evidenced by the fact that the company cut its dividend by nearly half in January, as well as its recent announcement that it will close 25% of all U.S. stores by 2027, Kim noted.
“I believe that managing costs and focusing on key profitable markets is a good strategy, but the near future of [Walgreens] remains uncertain,” he said.
Another healthcare leader — Hal Andrews, CEO of a market research firm Trilliant Health — noted that Wentworth appears to have concluded that Walgreens needs to return to its pharmacy and retail roots. He thinks it’s a good thing that Walgreens is withdrawing from the primary care space while simultaneously expanding its specialty pharmacy presence through its Shields Pharmacy Solutions subsidiary.
During the earnings call in late June, Wentworth said Walgreens’ financial recovery will be driven by “disciplined cost management at VillageMD, coupled with strength at Shields.”
The company announced a move to strengthen its core pharmacy business in April, detailing plans to deepen its specialty pharmacy offerings to include cell and gene therapy services.
“The phrase ‘everything is on the table’ that Wentworth used on the earnings call is how a CEO describes a review of anything and everything his predecessors have done, and Wentworth is clearly questioning the strategy of his recent predecessors — with the exception of the Shields acquisition,” Andrews said.
Can Walgreens Recover?
For Andrews, Walgreens is too big to fail.
He believes the company’s biggest hurdle to optimizing its retail portfolio will be protests from local officials and residents in communities affected by the upcoming store closures. Andrews is confident Wentworth can overcome these challenges, given his track record of successful leadership at Express Scripts and Evernorth.
Andrews noted that Wentworth’s most telling comment during the earnings call was, “Pharmacy is actually the value-based healthcare provider in the ecosystem, frankly, if you really look at the cost of outcomes and the work we can do to impact those outcomes.”
In other words, pharmaceutical interventions have immense value to patients, often more than the hands-on care provided by health systems, he explained. Take obesity treatment as an example — in the emerging battle between hands-on care and pharmaceutical innovations, Ozempic and Mounjaro are positively impacting people’s lives more than bariatric surgery, Andrews said.
UpScriptHealth’s Axe also has faith that Walgreens will bounce back. How quickly the company can turn things around depends on how aggressive Wentworth and the rest of his leadership team decide to be in the coming months when it comes to cutting costs and shifting focus, he said.
“The problem CEOs create when companies are failing is that they don’t act boldly enough. Walgreens’ recent investor call would lead you to believe that they know they are at a critical juncture and need to make drastic changes. We will soon know whether or not they will make those changes,” Ax said.
Wentworth has the respect of the investment community, which should give it enough flexibility to enact a multi-quarter corporate restructuring plan, Axe said. In his view, that plan should initially focus on investing in automation and other infrastructure technologies to support pharmacy care, as well as partnering with digital health companies to increase prescription volume.
This plan also needs to focus on closing underperforming stores and repurposing stores with expensive rents, Axe added.
“The leases on many Walgreens stores may make them too expensive to close, so [Wentworth] should consider turning some retail locations into automated distribution centers, acting as “closed-door pharmacies,” he said.
Axe noted that Wentworth has “an excellent track record of quickly understanding problems and reinventing a path to success,” saying he “wouldn’t bet against” Walgreens’ new CEO.
If Wentworth Walgreens’ reinvention is successful, Wall Street could reward the stock.
Photo credit: Joe Raedle, Getty Images