(480) 923-0802

Our Take: Walgreens to invest nearly $1 billion in Shields Health Solutions

Sep 27, 2021

Walgreens Boots Alliance (WBA) announced last week that it will invest approximately $970 million in Stoughton, Mass.-based Shields Health Solutions, a specialty pharmacy services provider that partners with more than 70 hospitals and health systems throughout the country.

WBA already owned a minority stake in Shields. With this new investment, it will own approximately 71% of the company. WBA will also have the option to acquire the remaining equity interests in Shields.

The investment is subject to customer closing conditions. WBA anticipates completing the transaction in February. Shields will continue to operate as it currently does, according to the announcement, and will retain its existing executive leadership team.

“We’re continuing to make strategic investments in pharmacy and health care solutions that can build on our core pharmacy business and further expand our health care reach in communities,” said Roz Brewer, CEO of Walgreens Boots Alliance. “The Shields model has shown to improve patient care and will be complementary to our existing specialty pharmacy offering, further expanding our capabilities to best meet the needs of health system partners and patients.”

Shields increased its health system footprint in January when the company combined with ExceleraRx Corp., a company that Fairview Health Services founded in 2012 to help health systems buy specialty medications.

Our Take: The New York Times wrote in January that WBA “is trying to become more of a health care company than retailer as sales of drugs and convenience products increasingly shift online.”

The company is persisting in its bid to be a dominant presence in the health care market through various channels, including affiliations with hospitals and health systems. It’s also trying to entice more customers — or at least more business from existing customers — by offering new financial services and products.

Under the leadership of Roz Brewer, who took the CEO reins at WBA in March, Walgreens introduced the myWalgreens credit card program in August, featuring two cards the company touted as “industry-first health and wellness cards.” Customers can use the cards to earn Walgreens Cash rewards on eligible brands and pharmacy purchases. Then, earlier this month, Walgreens launched Scarlet, a bank account and debit card that also earns Walgreens Cash rewards.

On the health care front, Walgreens announced a collaboration this month with Blue Shield of California to expand the insurer’s service offerings. The objective, the companies said, is to close care gaps for Blue Shield of California members, both virtually and in Walgreens stores. And, as we reported in last week’s Our Take, Walgreens just entered into a five-year strategic affiliation with Northwell Health to improve patients’ health and advance health equity throughout New York and beyond.

Before being named as Stefano Pessina’s successor in January, Roz Brewer was the chief operating officer at Starbucks, and prior to that she was the CEO of Sam’s Club. Her Walgreens signing bonus totaled nearly $25 million, the Chicago Tribune reported, citing a filing with the Securities and Exchange Commission.

The market reacted favorably to her hiring, with WBA’s share price increasing 5% the day after the company made the announcement. Pessina had been CEO since 2015 and currently serves as executive chairman.

When WBA announced in March that Brewer was beginning her new role, the company noted that Pessina had “transformed and modernized the company” during his six-year tenure as CEO, “significantly expanding WBA’s retail footprint and investing in digitalization.”

It was during Pessina’s time as CEO that WBA acquired Rite Aid for $4.4 billion, giving Walgreens “an even presence everywhere in the U.S., [and] bringing more services to the customer,” in Pessina’s words from a 2016 Forbes article.

Pessina was also at the helm when WBA announced in July 2020 that it would invest nearly $1 billion in VillageMD and open at least 600 Village Medical at Walgreens locations over the course of four years.

Last November, WBA rolled out the myWalgreens loyalty program. In January, while Pessina was still CEO, WBA sold its drug wholesale business, Alliance Healthcare, to AmerisourceBergen for approximately $6.5 billion.

Despite these transformative moves, and even though WBA became the world’s largest operator of retail pharmacies under Pessina’s leadership, investors saw their WBA shares lose more than half their value in the five years between July 2015 and July 2020.

Cory Renauer wrote in an article published July 27, 2020, by The Motley Fool that although the company steadily increased its total revenue during that five years, “its bottom line stagnated for several years before sliding off in 2019, then falling off a cliff when the COVID-19 pandemic hit.”

Brewer seems well-prepared to grow Walgreens’ customer base through her previous leadership roles at Starbucks, Sam’s Club, Walmart, and Kimberly-Clark. But she came to WBA with no experience in the health care or pharmaceutical industries. Pessina, on the other hand, had decades of experience in the drug wholesale and retail business and had overseen multiple mergers and acquisitions when he became CEO of Walgreens Boots Alliance.

Can Brewer do what Pessina could not — keep WBA’s investors happy while also increasing revenue? Can she transform Walgreens as much as Pessina did, or more? We’ll check back in a few years and see.

What else you need to know
Verily, the life sciences unit of Alphabet and sister company to Google, is seeking to gain its independence, potentially through an IPO, Insider reported. According to the report, early this year Verily launched a project known internally as Flywheel that is focused on detaching Verily from Google’s computing infrastructure. Flywheel’s goal is to prepare Verily to become a stand-alone entity. One step toward that goal is to transition Verily from using Google’s internal cloud software to a public version that is available to any business. The Insider report noted that Verily and Google are working together on the project. It also noted that Verily wants to “diversify revenue across other products,” such as Onduo, a virtual care model launched in 2016 with an initial focus on type 2 diabetes.

Centene and Humana are suing Merck, in separate lawsuits, claiming the drugmaker’s steps to delay generic competition for Zetia (ezetimibe) and Vytorin (ezetimibe/simvastatin), both of which are used to treat high cholesterol, caused the insurers to overpay for the drugs — “by hundreds of millions of dollars,” according to Centene. The insurers’ lawsuits allege that Merck engaged in a “monopolistic scheme” in which it filed a patent-infringement lawsuit against Glenmark Pharmaceuticals to prevent the launch of Glenmark’s generic version. Merck and Glenmark then settled the lawsuit, with the generic drugmaker agreeing to delay its launch for five years and Merck agreeing to give Glenmark an exclusivity period of at least 180 days when the generic did launch, during which time Merck would not launch its own authorized generic version. Centene claims that Merck “reaped billions of dollars in additional sales” of the drugs because there were no generic alternatives. Glenmark is also named as a defendant in the lawsuits. Kaiser Permanente filed a similar lawsuit against Merck and Glenmark this summer.

In separate but related news, CVS and Rite Aid also filed a lawsuit against Gilead Sciences, Bristol-Myers Squibb, and Teva Pharmaceuticals. In that lawsuit, the pharmacy chains allege that the drugmakers participated in a similar “pay for delay” arrangement for several of Gilead’s HIV drugs, including Viread, Truvada, Atripla, Descovy, and Vemlidy (all based on tenofovir disoproxil fumarate, tenofovir alafenamide fumarate, and/or emtricitabine).

Six drug companies are facing potential fines for continued violations of federal law that requires them to provide 340B drug pricing program discounts on eligible drugs at community pharmacies. The Health Resources and Services Administration (HRSA) sent letters to AstraZeneca, Eli Lilly, Novartis, Novo Nordisk, Sanofi, and United Therapeutics informing them that their cases have been referred to the Department of Health and Human Services’ Office of Inspector General (OIG). The drugmakers have refused to offer 340B pricing on outpatient drugs to safety-net hospitals through their partnerships with community pharmacies. HRSA asked the OIG to determine if the drug companies are liable for civil monetary penalties that could add up to more than $5,000 per violation, Healthcare Dive reported.

CMS extended the ACA open enrollment period by 30 days and increased the previously finalized user fees that insurers will pay to participate on the federally and state-run exchanges. The fee increase of .50% will be used to help pay for additional outreach efforts. CMS noted in a press release that, despite the increase, the “2022 Marketplace user fee rates remain lower than those for 2021.” The changes are part of the final rule CMS issued on Sept. 17, which is the third installment of the annual payment notice for 2022. Starting this year and moving forward, the open enrollment period for the federally run exchanges will be from Nov. 1 through Jan. 15. In the rule, CMS also created a new monthly special enrollment period to expand access to coverage for eligible low-income individuals.

Executive moves

A number of leadership announcements have been made recently, including the appointment of Margaret Pastuszko as president of New York City-based Mount Sinai Health System. Pastuszko has been with Mount Sinai since 2000, most recently serving as executive vice president, chief operating office (a role she will retain along with her new position), and chief strategy officer. Keck Medicine of USC announced that Rodney Hanners has been chosen as its permanent CEO, as well as president and CEO of USC Health System. Hanners has served as the interim CEO since June 2020. And, citing a letter that Tenet Healthcare’s CEO wrote to staff, Becker’s Hospital Review reported that Audrey Gregory is resigning as CEO of Detroit Medical Center effective Oct. 22. (The medical center is part of Dallas-based Tenet Healthcare.) According to Becker’s, Brittany Lavis, the medical center’s chief financial officer, will serve as interim CEO. Gregory, who has served as Detroit Medical Center’s CEO for two years, will be joining AdventHealth in Florida, the health system said in a press release.

What we’re reading
Revitalizing the U.S. Primary Care Infrastructure. NEJM, 9.23.21 (subscription required)
Athletes Are Shifting the Narrative Around Mental Health at Work. Harvard Business Review, 9.24.21

Contact Darwin Research Group and we will get right back to you.