Walgreens Steps Up Retail Clinic Expansion As Demand For Convenient Care Grows

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As selling medicines become less profitable, pharmacies have been looking for new avenues for growth. Most of the top pharmacy chains in the U.S. are, therefore, increasing focus on selling beauty products and also remodeling stores in the process. Drug retailers have found another source of growth in retail health clinics, which have been proliferating across the U.S. for the last few years. Walgreens (NASDAQ:WBA) currently has 400 healthcare clinics spread throughout the country. CVS Health (NYSE:CVS), on the other hand, is far ahead in the race with about 1,000 clinics and plans to further expand to 1,500 clinics by 2017. In an attempt to narrow this gap down, Walgreens recently announced a collaboration with Providence Health and Services [1] through which new clinics will open at Walgreens stores, but will be owned and operated by Providence and its affiliates.

As more people continue to come under insurance coverage, the shortage of primary care physicians (PCPs) is only expected to increase. These clinics will address the growing need for easy-to-access and faster care which other settings do not offer. They would also drive sales of OTC and beauty products as visiting patients are likely to make additional purchases. These factors make it a win-win situation not only for drugstores and patients, but also for larger hospital settings, which could utilize their resources for treating more complex conditions. Below we look at some of the factors discussed above in more detail.

Our current price estimate for Walgreens stands at $70, which is at a discount of about 20% to the market price.

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View our analysis for Walgreens

Existing Shortage and Increasing Demand For PCPs

According to a new study conducted by the Association of American Medical Colleges (AAMC) [2], demand for physicians is expected to grow faster than supply, leading to a projected shortfall of between 46,100 and 90,400 physicians by 2025. While some demand is generated from changing demographics (i.e., the aging population of baby boomers), the implementation of the Affordable Care Act (ACA) is expected to further drive up demand as more people come under insurance coverage. Considering the health and risk factors of the population likely to gain insurance (out of the 26 million people who otherwise would be uninsured in the absence of ACA and estimated changes in utilization levels), the projected increase in demand for physician services is about 2.0% above that created by changing demographics.

Low Pricing and Convenience Are The Key Demand Drivers

According to CVS spokesman Brent Burkhardt, convenience is the major factor driving demand for walk-in retail clinics, which also charge less than urgent care centers. Availability at short notice, shorter waiting times and longer opening hours, compared with doctors’ offices, give the retail clinics an upper hand over the latter, especially in case of patients with non-life-threatening but frequent ill­nesses, such as ear infections, sinus infections or minor cuts.

Affordability and fixed pricing make retail clinics even more attractive. Dr. Ateev Mehrotra, an associate professor at the Harvard Medical School and a policy analyst at the research organization Rand Corp, co-authored a study on the quality of care for three common conditions and found encouraging results for these clinics. It was found that the quality of treatment was similar across retail clinics, physician offices and urgent care centers. Additionally, retail clinics were found to offer the services at a significantly lower cost, averaging at $110 compared to $166 at physician offices, $156 at urgent care centers and $570 in emergency departments [3]. Driven by the demand generated by these factors, the number of retail clinics in the U.S. is expected to go up quickly, as pharmacies compete for patients.

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Notes:
  1. Walgreens News Release []
  2. AAMC: The Complexities of Physician Supply and Demand []
  3. The Washington Post []