Courtesy Walgreens
Walgreens CEO Stefano Pessina.
- Major corporations and small business owners are trying to figure out what the future of the pharmacy business looks like.
- CVS Health and Walgreens, the two biggest pharmacy chains in the US, are taking very different approaches.
- CVS in 2018 acquired health insurer Aetna and has plans to massively roll out health-centered stores, in a bet that going deeper into healthcare will be the way forward.
- "What we're witnessing is the evolution of the drugstore from what it's been to what it needs to be to meet the needs of consumers," CVS CEO Larry Merlo told Business Insider.
- Walgreens has bet far less of its future on healthcare, and its stock is slumping.
- On Monday, Bloomberg reported that private-equity firm KKR has formally approached Walgreens in talks to go private.
- Should that happen, it could give Walgreens breathing room to figure out what its evolution looks like, though it faces a number of challenges.
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Walgreens is reportedly considering going private, and a report that private equity firm KKR has formally approached the pharmacy giant had the stock soaring.
Still, that was a bright spot in an otherwise tough period for Walgreens, the second-largest
CVS Health, the biggest pharmacy chain, has also faced challenges, and its stock is down 10% over the past year. Over the same period, the S&P 500 index is up about 14%.
Retailers like Walgreens and CVS are facing pressure to get people to walk into their stores as customers shop for everyday goods on websites like Amazon, instead. CVS has set a healthcare-focused strategy to guide its path forward, ending sales of cigarettes and acquiring a health insurer. The company is offering more medical appointments in stores, as well.
"What we're witnessing is the evolution of the drugstore from what it's been to what it needs to be to meet the needs of consumers," CVS CEO Larry Merlo told Business Insider in a November interview.
Courtesy Forbes
CVS Health CEO Larry Merlo.
"It's time for another evolution," he said. "We see us leading that evolution with what we're doing, with our strategy and the drug store becoming more of a health destination."
Walgreens, on the other hand, doesn't sell health insurance and just said it would shutter some of its in-store clinics. The company has instead been striking up partnerships with companies like Kroger, Jenny Craig, and even subscription beauty company Birchbox to fill its stores.
Why Walgreens might want to go private
Going private would relieve some of the quarterly pressure Walgreens faces as a public company, according to Arun Sundaram, an analyst at CFRA. He said company's done work to manage its costs and build out pilots as ways to improve the its financials. Even so, the company would still need to execute its strategy under the new owners.
Walgreens has been hit with slumping front-store sales and declining reimbursements for the drugs it dispenses, both of which have hurt its profits. Analysts at Raymond James for instance wrote in a note after Walgreens' quarterly earnings that they have doubts about the company's ability to increase gross profits.
Walgreens has declined to comment on the reports that it's going private. KKR did not return a request for comment on the potential deal.
The competitive environment remains difficult for retail pharmacies. The business is constantly changing as new entrants like Amazon get into the space through its acquisition of PillPack, and companies like CVS and Cigna amass more control over how healthcare dollars get spent.
The pharmacy business is under pressure
In 2018, Business Insider spoke with more than a dozen independent pharmacists about the challenges their businesses are facing. The pharmacists said they're getting paid less and less for the prescriptions they're dispensing, while losing customers to mail-order systems they say their patients feel pressured to join.
To survive, pharmacists are getting creative, looking to get paid for providing healthcare to their customers, rather than solely for the pills they dispense.
CVS has pursued a similar strategy, though it has its hands in many more pieces of the pharmacy ecosystem. CVS already owns a major company that pays out reimbursements to pharmacies, uses its stores to deliver care via health clinics, and owns a health insurer.
Walgreens has taken a different path.
At the end of 2014, US-based Walgreens merged with Switzerland-based Alliance Boots, a wholesale and retail pharmacy giant in Europe that had a big presence in beauty. Alliance Boots had come together under now-Walgreens CEO Stefano Pessina in 2006 and was taken private in 2007 under KKR.
Globally, Walgreens Boots Alliance has 18,750 pharmacies across 11 countries.
Walgreens is struggling in the US
Its US business had had the toughest time, Evercore ISI analyst Elizabeth Anderson wrote in a November note. Walgreens operates roughly 9,300 pharmacies and has been striking up partnerships with grocery stores, health plans, beauty subscription boxes, and tech giants Microsoft and Alphabet, with the hope of finding new ways to make use of its drugstores and draw customers.
It recently beefed up a partnership with weight-loss company Jenny Craig to open 100 locations in Walgreens stores.
The partnerships strategy has historically drawn skepticism from investors, however, because the ventures fall short of the big transactions pursued by the company's rivals and are slow to add to profits.
And instead of getting into other lines of business, such as buying a health insurer - something CEO Stefano Pessina has since said he should have done a few years ago- it doubled down on pharmacy, acquiring the Rite Aid chain. Walgreens still sells tobacco products, though it's now in the process of de-emphasizing them, which has cut into sales.
In its October earnings report, Walgreens reported that its net earnings fell 55% compared to the same quarter in 2018, which the company attributed in part to a cost-cutting plan that's expected to cut $1.8 billion by 2022. While pharmacy sales increased by 4.2% compared to the fourth-quarter 2018, comparable retail sales decreased 1.2%, which Walgreens attributed to the de-emphasis of tobacco.
CVS's move deeper into health has been years in the making
In 2014, CVS stopped selling cigarettes and other tobacco products, a major step on its path toward becoming a health company. That culminated in the company's $70 billion deal for health insurer Aetna in 2018.
CVS now combines a chain of nearly 10,000 pharmacies and a massive pharmacy-benefits business with one of the biggest US health insurers. The result is an entirely new healthcare company that could wield a tremendous amount of power over how healthcare gets paid for and provided to people.
One of the ways CVS is doing that is through its HealthHub stores, which have an increased focus on health services, including a wellness center and more chronic-care management for diseases like diabetes. Typically, the company is committing about 20% of the physical store space to health endeavors. CVS plans to open 50 HealthHub stores this year, and 1,500 by the end of 2021.
To be sure, CVS's deep dive into HealthHubs is a risky bet, because operating clinics is costly.
Past forays by retailers into clinic services have fallen flat. For instance, Walmart, which is making another big push into healthcare, never completed an earlier plan to open as many as 2,000 clinics.
But by owning one of the US's largest insurers, CVS stands to gain from the use of the HealthHubs beyond what it makes within the store. CVS can benefit from providing low-cost care to patients because of its ownership of the health insurer Aetna. If the HealthHubs help Aetna decrease the amount it spends on healthcare for its members, that would result in higher profits for the company.
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