One crucial question from an analyst on Walgreens' earnings call sums up the massive pressures facing the pharmacy giant
- Pharmacy giant Walgreens' stock dropped 6% after missing Wall Street's expectations.
- It's a tough time for the company, which finished 2019 as the worst-performing stock on the Dow Jones Industrial Average.
- Walgreens tumbled 13.7% last year, while the S&P 500 rose 28.8%.
- The company's prescription volume didn't grow as much as the company expected during the three months that ended November 30, and the company's gross profits decreased by 5%, which the company attributed to reimbursement pressure outweighing other gains the company made.
- The company has been relying on partnerships and a digital strategy as a path forward.
- A question from Evercore ISI analyst Elizabeth Anderson about the competitive pressures facing the US pharmacy summed up the challenges ahead for the company.
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Investors are still waiting for a Walgreens turnaround.
On Wednesday, the company reported its fiscal first-quarter earnings, disappointing Wall Street, and sending the stock tumbling 6% by midday.
"It has been a slow start to the financial year with a competitive U.S. pharmacy environment and soft trading conditions in the UK," Walgreens CEO Stefano Pessina said at the start of the call.
A tough first quarter comes on the heels of a tough year
It was a continuation of a rough 2019. Last year, Walgreens was the worst-performing stock on the Dow Jones Industrial Average, as Pessina struggled to land on a strategy that would satisfy investors and improve results.
Retailers like Walgreens and CVS Health are facing pressure to get people to walk into their stores as customers shop for everyday goods on websites like Amazon, instead. CVS was up just 13.4% last year, lagging behind the huge 28.8% gains of the S&P 500 Index. Walgreens slumped 13.7%.
But while CVS has set a healthcare-focused strategy to guide its path forward by acquiring health insurer Aetna, Walgreens has been relying on partnerships with companies like Kroger, Jenny Craig, and even subscription beauty company Birchbox to fill its stores. The company has also touted investments in its digital strategy as a way forward.
Walgreens has also reportedly been considering going private. A report in November that private equity firm KKR has formally approached the pharmacy giant had the stock soaring, though no deal has yet emerged.
Walgreens' fiscal first quarter results, which are for the three months through November 2019, reveal the challenges facing the company. In the US, Walgreens front-store sales declined by 0.5%, while prescriptions increased 2.8% - a lower prescription volume than the 4% growth the company expected. Gross profits in the US decreased 5%, attrbuted to reimbursement pressures outweighing savings Walgreens got from prescription drug volume growth and procurement savings.
The competitive pressures Walgreens faces
A question from Evercore ISI analyst Elizabeth Anderson about the competitive pressures facing the US pharmacy summed up the challenges ahead for the company, after it missed the prescription volume growth it expected.
Anderson asked about the changing competitive environment facing Walgreens' US pharmacy business, asking for clarification about what the team is seeing.
In answering, Alex Gourlay, the co-chief operating officer of Walgreens Boots Alliance and president of Walgreens, pointed to the pressures that have been created by consolidation among some of the companies that do business with Walgreens. Those companies, known as PBMs or pharmacy-benefit managers, purchase drugs on behalf on insurers and employers, and are pressing Walgreens for lower prices, Gourlay said.
"The PBMs are working more closely together. That's clearly putting more pressure on the marketplace for better pricing," Gourlay said.
Drugstore giant CVS Health operates a PBM called Caremark, while health insurer Cigna owns a PBM called Express Scripts. Prime Therapeutics, the organization responsible for managing the pharmacy benefits of 18 Blue Cross and Blue Shield plans, in December reached an agreement with Express Scripts, giving Prime access to Express Scripts' retail pharmacy network and pharmaceutical contracts.
Gourlay also broke down the pressures facing the pharmacy's work with three insurance markets: Medicaid, Medicare, and older - and commercial.
In Medicaid, Gourlay said, Walgreens lost access to some markets and has to offer a new pharmacy model for patients on Medicaid. In particular, Walgreens is working with insurer Centene.
"We recognize that we are under share there, and we have to operate differently in that marketplace," Gourlay said.
Gourlay pointed to a bright spot in Walgreens' work in Medicare with UnitedHealthcare, which includes a co-branded Medicare Advantage plan that launched in October 2019.
But the success Gourlay noted with UnitedHealthcare doesn't extend to all Medicare Advantage plans, he said. He pointed to challenges in working with Aetna, which is owned by CVS Health.
"Obviously, we're doing less well with the other strong performer, which is Aetna Insurance," Gourlay said. "They've done really well, and we're doing less well with them for the obvious reasons."
Gourlay's only note on the commercial insurance market was that the company had renewed its contract with Prime, which he said is "a very important book of business for us in the commercial network."
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