Walgreens is currently experiencing significant difficulties, leading to its poor performance.
Walgreens' shares have fallen by over 80% over the past five years, placing the company among the poorest performers during this period. The company is shutting down 1,200 stores, which equates to around 15% of its total outlets. Additionally, rumors suggest that Walgreens is considering leaving the public market.
According to a report in the Wall Street Journal, Walgreens is in talks with private equity firm Sycamore Partners about potentially taking Walgreens private. Neither company has commented on these speculations to CNN.
Pharmacies are no longer what they used to be
Walgreens' main issue is that it is more of a traditional pharmacy compared to CVS.
Walgreens is lagging behind CVS as it is smaller, which limits its ability to negotiate prices with insurance companies and healthcare providers that cover most prescriptions. Walgreens is also more reliant on its pharmacy services and retail sales of snacks and household items compared to CVS, which has expanded its healthcare services. The profitability of both sectors is facing challenges.
During recent years, the profitability of the pharmacy sector has decreased due to falling reimbursement rates for prescription drugs. The cost customers pay for drugs and the payments pharmacies receive are largely influenced by pharmacy benefit managers (PBMs), who negotiate rebates from drug manufacturers for insurers. However, PBMs have been reducing reimbursement rates to boost their own profits.
The retail front of drugstores, which offers snacks and household necessities, has seen dwindling profitability as more of these items are purchased online from competitors such as Amazon or big-box stores like Walmart and Costco. Walgreens derives 26% of its US retail pharmacy sales from its front-end business, while CVS draws 21% from this section.
CVS is encountering similar challenges but has extended its presence in the more lucrative health care sector through partnerships with insurer Aetna and its own PBM, Caremark. The problems in CVS's pharmacy and retail sectors have been counteracted by its insurance and PBM business.
Around 80% of all prescriptions are managed by just three companies – Cigna, CVS, and UnitedHealth, as per the Federal Trade Commission.
It's worth mentioning that CVS is also facing difficulties, with over 1,000 stores closed in recent times. Its CEO was replaced earlier this year, and there are rumors of the company being split up.
Pharmacy closures are a national issue
A research study published in the journal Health Affairs reveals that pharmacy closures are a problem nationwide and can have serious repercussions for public health.
Researchers found that almost one-third of pharmacies closed between 2010 and 2021. Around a third of counties experienced a decrease in the overall number of pharmacies, and the risk of closure was higher in predominantly Black and Latino neighborhoods.
Independent pharmacies, which often face exclusion from PBM networks, were more than twice as likely to close as chain pharmacies.
As per Jenny Guadamuz, assistant professor at the UC Berkeley School of Public Health, who co-authored the study, "Our findings suggest that closures may exacerbate health disparities in access to prescription and other essential pharmacy services, such as vaccinations and pharmacist-prescribed regimens, including contraceptives, medications for HIV prevention, and treatments for opioid use disorder."
Walgreens' business strategy, which relies heavily on its pharmacy services and retail sales, is facing challenges due to decreasing reimbursement rates for prescription drugs and dwindling profitability in the retail front.
The profitability issues faced by Walgreens and CVS are largely influenced by pharmacy benefit managers (PBMs) who negotiate rebates from drug manufacturers and have been reducing reimbursement rates to boost their own profits.
