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Our Take: Walgreens ratchets up efforts to boost profitability, will close company-owned in-store clinics

Nov 04, 2019
During an earnings call with analysts last Monday, Walgreens Boots Alliance (WBA)’s co-chief operating officer, Alex Gourlay, announced that the company would be closing its 157 wholly owned clinics by the end of the year as part of a plan to achieve annual savings of $1.8 billion by 2022.

The clinics offer basic health care services such as flu shots, physical examinations, and treatment for minor illnesses and injuries, without requiring an appointment.

The 217 clinics in Walgreens stores that are owned by health systems will remain open, and some of the clinics currently owned by Walgreens will be transitioned to ownership by local health systems, like the seven in Cincinnati that TriHealth will take over.

Staff reductions were also mentioned during the call as another cost-cutting measure. James Kehoe, Walgreens’ global chief financial officer, said the company had laid off employees at its corporate headquarters in Deerfield, Ill. He didn’t specify how many positions had been eliminated, but he noted that the firm’s global digital and IT leadership had been reorganized and that “additional restructuring” was underway in other divisions.

Walgreens posted a 55% decrease in net income for the fiscal fourth quarter relative to the equivalent prior-year period. To stave off competition — not just from other drugstore chains but also from retailers such as Kroger and Walmart, online shopping options such as Amazon, and even telemedicine, which is slowly gaining traction — the company is looking to transform and differentiate itself, “to become a more efficient enterprise.”

After operating its own clinics for several years, Walgreens hasn’t been able to make them profitable. So, while the company is perfectly willing to provide the real estate for the health systems’ clinics, it’s finding other uses for the space in stores where its own clinics are being shuttered.

For instance, Walgreens said a few weeks ago that it intended to open at least 600 new “LabCorp at Walgreens” service centers over the next four years. And in April, it announced a partnership with VillageMD to open state-of-the-art primary care clinics that will focus on providing more comprehensive care for patients with chronic conditions, such as diabetes, hypertension, and heart disease — similar to the 1,500 HealthHUBs that CVS Health plans to launch by the end of 2021. And at the beginning of this year, Walgreens said it would be opening “digital health corners” in collaboration with Microsoft to sell health care-related hardware and devices.

Most recently, Walgreens announced that early next year it would be opening 100 new “Jenny Craig at Walgreens” locations in 20 states.

Not counting the 200 stores that Walgreens said in August it would be closing, the company has nearly 9,300 locations in the United States. During the conference call, Gourlay mentioned plans to open more “small store” pharmacies — locations with more of a focus on health and wellness, including prescriptions, of course, and over-the-counter health care products. Twenty such stores are already up and running, and another 10 or so are under construction, mostly in larger cities.

Our Take

As we review the dizzying array of initiatives announced over the last year or so, Walgreens appears to us to be adrift without a coherent strategy. We dare you to get through WBA’s CEO Stefano Pessina’s opening statement on the conference call:

“We have continued to make progress against our four strategic priorities, accelerating the digitalization of our company in terms of the way we use technology to help us run our businesses more efficiently and effectively and more importantly to announce and transform the products and services that we offer our patients and customers and in the way we deliver those services; transforming and restructuring our retail offering, making sure we provide our customers what they want in the way they want; and using the strength of our extraordinary local presence as an asset to support and reach a modern multichannel tailored and far more focused responsive and interactive retail experience; and creating within our store a network of healthcare destination, backed by our digital investments, providing both services and support.”

Huh?

Pessina took over the helm at WBA about five years ago, ousting then-CEO Greg Wasson after Pessina’s UK-based pharmacy chain Boots Alliance was acquired by Walgreens. As a result, Pessina is by far WBA’s largest shareholder, with a 15% stake in the company. At the time of the acquisition, he was viewed by Wall Street as uniquely suited to drive Walgreens’ retail presence and turn the company around.

How has Pessina fared? WBA’s share price is down 70% over its five-year high and down 21% from Dec. 31, 2018.

So much for a corporate savior.

(To be fair, rival CVS Health’s share price is down 67% over its 5-year high; after shares plummeted earlier this year, they’ve rebounded to be essentially unchanged from the end of last year. CVS also ended 2018 with an operating loss.)

Retail pharmacy chains depend on higher-margin retail sales, which Boots Alliance stores have maintained over the years to be about 65% of total sales. In the U.S., however, Walgreens store revenue had 33% of sales in fiscal 2016 coming from retail sales, and 67% represented by pharmacy sales. By 2018, retail sales fell to 28% of total sales. That’s not the kind of trend investors are looking for.

Share prices don’t tell the whole story of WBA’s performance, though. Since 2014, WBA has posted a 15% average annual increase in total revenue and a 32% annual average increase in operating income.

Given Pessina’s substantial holdings in WBA, it’s unlikely that he will be replaced anytime soon.

“It doesn’t mean he’s emperor of Walgreens for life,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business, in a Crain’s Chicago Business interview. “What it does mean is that he doesn’t go until the rest of the shareholders make him so miserable he decides he’s had enough.”

Whoever is running the business, it’s clear to us that the company lacks a clear and consistent vision, evidenced by, as we said, numerous disconnected pilot programs like Jenny Craig at Walgreens, its alliance with VillageMD, and moving away from owned in-store clinics. With the likes of Amazon on its heels, WBA is going to have to do better as it reinvents itself.

What else you need to know
Insurers will receive $1.59 billion in unpaid subsidies if the federal government follows through on a judge’s order. Chief Judge Margaret Sweeney of the U.S. Court of Federal Claims entered a judgment Tuesday in a class-action suit, ordering the government to pay more than 100 insurers for cost-sharing reduction (CSR) payments under the Affordable Care Act that weren’t paid for 2017 and 2018. The government is expected to appeal the ruling, as it previously has in similar cases. The CSR cases are separate from litigation over unpaid risk corridor payments; the Supreme Court will hear oral arguments in the appeal of a Federal Circuit Court decision in that case on Dec. 10.
California’s attorney general put the kibosh on the Adventist-St. Joseph merger. In April 2018, Roseville, Calif.-based Adventist Health System/West and Irvine, Calif.-based St. Joseph Health System established a joint operating company with the intent of integrating some of their respective facilities in the northern part of the state. But on Thursday, Chief Assistant Attorney General Matthew Rodriquez sent a letter to the organizations informing them that a review of the proposed merger found that the proposed deal “is not in the public interest, including, but not limited to, having the potential for increased health costs and concerns over access and availability of health care services.”

UPMC has begun building a network of hospitals in China with Wanda Group, a conglomerate based in Beijing. UPMC announced the ground-breaking ceremony for the Chengdu Wanda-UPMC International Hospital in a press release last Monday. Four additional hospitals are planned for other major cities in China as part of a 20-year agreement between UPMC and Wanda Group. UPMC will provide expertise in designing and operating the hospitals, Wanda Group will provide the financing, and the two organizations will co-manage the hospitals. Jeffrey Romoff, CEO of UPMC, said the “first-of-its-kind network will become the largest presence of American-style academic medicine outside of the United States.”

An Oregon insurer has filed an antitrust lawsuit against three health systems. In the suit, Eugene, Ore.-based Trillium Community Health Plan, a community care organization (CCO), alleges that Legacy Health, Providence Health and Services Oregon, and Oregon Health & Science University have conspired to “boycott” Trillium after state regulators awarded Trillium a contract in July to serve Medicaid beneficiaries in the Portland metro area. Trillium says the three health systems control the 11 largest hospitals in the tri-county area and their associated physician groups, effectively dominating the local provider market. The Oregonian noted that the three defendants are founding members of Health Share, a rival CCO serving the Portland area.

Thomas Zenty, the CEO of Cleveland-based University Hospitals for almost 18 years, will retire in January 2021. While he has been at the helm, the health system has increased from three hospitals to 18. It also launched the state’s first proton therapy center and expanded its affiliation with Case Western Reserve University School of Medicine. The board of directors is expected to name Zenty’s successor by year-end.

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