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Call it “pharmageddon”. After years of rapid expansion, America’s biggest retail pharmacies are finding they cannot shrink themselves fast enough.
Walgreens Boots Alliance last month said it could close nearly a quarter of its 8,600 US retail stores over the next three years. CVS Health, which has closed more than 600 stores over the past two years, plans to close another 300 this year. Combined, that would represent about 10 per cent of the company’s 9,900 locations in 2021, when the closures were first announced. Rite Aid, the country’s number three chain, has shed hundreds of stores from its portfolio of about 2,100 stores since filing for bankruptcy protection in October.
Theft, higher labour costs, competition from mass market merchants and online drug delivery start-ups have all been blamed for the sector’s woes. That is true only to an extent.
Sales of so-called front-of-store offerings, such as candy, toothpaste and batteries, have been chipped away by Amazon at one end and retailers such as Walmart, Target and dollar stores at the other. At the same time, prescription drug margins are being squeezed by falling reimbursement rates and cheaper generics.
But in the case of Walgreens, its US problems have been exacerbated by its struggle to move into healthcare. A $6.2bn investment in VillageMD and the $8.9bn acquisition of Summit Health-CityMD have not panned out as hoped. It recently took a $5.8bn impairment on VillageMD and announced plans to close 160 of those clinics.
Buying primary care providers is easy. Making money off them is hard. Opening and running medical practices is capital intensive. Labour cost inflation, low reimbursement rates and the complicated process of billing and negotiating with insurers mean primary care centres are not very profitable.
Walgreens’ healthcare unit accounted for less than 6 per cent of the $110bn in revenue the company made in the nine months to end of May. Yet it racked up an operating loss of $13.7bn and pushed the group to a net loss of $5.6bn for the period.
Then there is Boots, the underinvested UK high street pharmacy chain that Walgreens had sought to sell. It abandoned the sale process in 2022 because of market conditions. It said during its earnings call last month that it would continue to devote resources to turn it around.
All this explains why Walgreens shares, down 77 per cent over the past three years and priced at just 5 times forward earnings, continue to trade at a discount to CVS. The latter is more diversified. It has built up a large pharmacy benefit management business and a leading health insurance division via acquisitions. Amid sector-wide pharmageddon, Walgreens in particular hasn’t found a prescription to close that gap.
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