Walgreens Boots Alliance (WBA) Last Update 1/11/21
Related: BBY CL COST HD
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Walgreens Boots Alliance
STOCK PRICE
DIVISION
% of STOCK PRICE
Retail Pharmacy
84.4%
$70.84
Net Debt
46.4% $38.93
TOTAL
100%
$83.93
$45.00
Yours
Trefis Price
N/A
$54.60
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Walgreens Boots Alliance Company

VALUATION HIGHLIGHTS

  1. Retail Pharmacy (U.S. Prescription Drugs, U.S. OTC Drugs & Other, International) constitutes 84% of the Trefis price estimate for Walgreens Boots Alliance's stock.
  2. Pharmaceutical Wholesale constitutes 16% of the Trefis price estimate for Walgreens Boots Alliance's stock.

WHAT HAS CHANGED?

  1. Impact of Coronavirus Crisis On Walgreens' Stock

    • The current coronavirus crisis impacted retail pharmacists due to restrictions on movement. On the positive side, the retail pharmacy stores were open across the globe, while most of the other stores weren't during the lockdown, given that the access to medication is an essential. Beyond medicines, stores such as Walgreens also sell many of the daily use staples, which aided its retail sales. Moreover, the company is providing Covid-19 test spaces at some of its stores.

      Walgreens stock lost more than 32% – dropping from $60 at the beginning of 2020 to below $41 in late March – then moved higher to $45 levels currently (through Jan 8 2021). That means it is lower than the levels it saw during Jan 2020. Why? Walgreens has been struggling with its international business, and it continued to weigh on the company's earnings over the past few quarters.

  2. Latest Earnings
    • Walgreens Boots Alliance announced its Q1 2021 (ended Dec 2020) results on Jan 7, followed by a conference call with analysts. The company reported revenues of $36.3 billion, up 5.7% y-o-y. However, Non-GAAP EPS came in at $1.22, reflecting a 11% decline compared to the prior year quarter. The company continued to face pressure in its UK business, due to stiff competition from online retailers.
  3. Main Drivers For Current And Future Growth

    • The success of its U.S. pharmacy sales was boosted by its new partnership with pharmacy-benefit manager Prime Therapeutics, which got completed earlier this year. The deal helped in the molding of pharmacy networks across important states that aided the volume growth in many areas.
    • Decline in the generic drug prices has been a constant roadblock into the growth path of pharmaceutical companies this year and this trend is likely to continue. Along with this comes the threat of bigger entities like Amazon likely to enter the pharmaceutical supply chain. However, Walgreens' recent deal with Rite Aid gives it leverage to grow its presence further in the domestic market. The addition of 1,932 stores, to its currently operating 8,138 stores, might give Walgreens an edge over one of its biggest competitors, CVS, which has a store count of 9,676.
    • Walgreens formed a specialty pharmacy and mail services company, AllianceRx Walgreens Prime, towards the beginning of this year. The mail services helped Walgreens fill more prescriptions this year which also acted as a driver for its pharmacy growth.
    • The program to simplify offerings across 1,500 stores is now complete and that is expected to improve the performance of the retail segment.
  4. Rite Aid Deal

    • In its deal with Rite Aid, Walgreens had spent around $750 million for acquisition related costs such as integrating the stores, etc. It also invested an additional $500 million in incremental capital expenditure towards store conversion and other such heads. Through this transaction, Walgreens realizes annual synergies due to cost savings, procurement, etc. to the tune of $300 million per year for a period of four years. After an exhaustive review, it has decided to close around 600 Rite Aid stores over an 18 month period beginning in spring 2018.

Other Acquisitions Over The Past

Boots Alliance

In June 2012, Walgreen acquired a 45% stake in European pharmacy business Alliance Boots for $6.7 billion, paying $4 billion in cash and 83.4 million in shares. The deal was received with investor skepticism about the cost and timing of the deal and the risks associated with increased exposure to the ongoing European economic uncertainties and increase in debt (~$11 billion). Nonetheless, Walgreen saw a long-term sense in the trans-Atlantic alliance. When the second- step transaction of the deal was completed in December 2014, it created the first global pharmacy business with 11,000 stores in 12 countries.

The deal provided Walgreens with a large platform for further international expansion based on Alliance's experience in expanding into new markets such as China and Latin America, along with the opportunity to turn Alliance Boots into a global wholesaler.

In November 2014, Walgreen secured financing to close the transaction, as well as refinance the majority of Alliance Boots outstanding debt and completed the acquisition in December 2014.

AmerisourceBergen

In March 2013, Walgreen and Alliance Boots, furthering their relationship as “Earth’s Drugstore” signed a deal with U.S. distributor AmerisourceBergen that will pool purchasing power to buy generic and branded prescription drugs around the world. The 10-year agreement with AmerisourceBergen ended Walgreen’s relationship with rival distributor Cardinal Health. Walgreen currently distributes more than 80% of its own drugs but over time most (if not all) of that distribution will be handled by AmerisourceBergen.

Stephen L. LaFrance Holdings Inc.

In July 2012, Walgreen acquired a 144-store strong regional drug retail chain, USA Drug, owned by Stephen L. LaFrance Holdings Inc., in a $438 million mostly-stock deal. The retail chain includes names such as USA Drug, Super D Drug, May's Drug Stores, Med-X Drugs and Drug Warehouse and has a major presence in mid-Southern United States.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Walgreens's Share of Retail Prescriptions Filled in the U.S.: Walgreens' share of the total prescriptions filled in the U.S. declined to 15.7% in 2012 as a result of its dispute with Express Scripts and loss of a major chunk of the corresponding 90 million prescriptions. The two reached a fresh agreement to allow Express customers fill prescriptions at Walgreen stores, starting September 15, 2012, which helped Walgreen regain its lost market share in 2013 and 2014. The company had around 17% share in the retail prescriptions filled in the U.S. in 2016 and it remained around the same 16.9% in 2018. We believe Walgreen's share in retail prescriptions filled in the U.S. will reach 20% plus by the end of our review period, based on the strength of its retail network as well as an increase in online sales post the acquisition of Drugstore.com. If Walgreen's market share in retail prescriptions declines to 15% due to slow growth, inability to attract lost and sticky customers or loss of more business, there could be a more than 10% downside to our current price estimate.

EBITDA Margin for Pharmacy Drug Sales: We currently forecast EBITDA margins for prescription drugs sales to rise marginally over our forecast horizon, from 9.0% in 2018 to 10% over the next few years. This increase is largely expected due to higher pharmacy margins resulting from an increase in generic drug sales, cost savings resulting from Walgreen's restructuring initiatives and greater buying power as a result of the agreement with AmerisourceBergen. However, if gross margins stay close to the current level, on account of an increase in reimbursement pressure from Pharmacy Benefit Managers (particularly in light of the ongoing industry consolidation), there could be a more than 10% downside to the Trefis price estimate.

BUSINESS SUMMARY

Walgreen is one of the largest pharmacy chains globally, which sells both prescription and non-prescription drugs as well as retail merchandise (cosmetics, convenience foods, photo processing services, seasonal merchandise). In addition to its store offerings, Walgreen provides pharmacy services like prescription fulfillment through mail order, telephone, and Internet.

In December 2014, Walgreens completed the second-step transaction of Alliance Boots, a UK based pharmacy giant, making it one of the largest drugstore chains globally. The new global enterprise brought together Walgreens (largest drugstore chain in US), Boots (market leader in retail pharmacy) and Alliance Healthcare (a leading pharmaceutical wholesaler and distributor).

Together, Walgreens Boots Alliance has a presence in 25 countries, with over 12,800 stores and more than 340 pharmaceutical distribution centers. The acquisition expanded the portfolio of Walgreens in retail, service and product brands along with the world's largest pharmaceutical wholesale and distribution network.

Walgreens, presently, operates the largest network of close to 8,200 locations across the U.S., with over 75% of US population living within a five mile radius of a typical Walgreen retail store and close to 4,600 locations internationally, and has stores located in United Kingdom, Mexico, Chile, Thailand, Norway, the Republic of Ireland, The Netherlands, and Lithuania.

Walgreens's operational efficiency is noteworthy as its average chain wide retail sales per square foot is approximately $800, higher than that of Wal-Mart and other retail stores that sell drugs and general merchandise. Of these, around $300 come from general merchandise sales. Pharmacy sales as of February 2016 represented 65% of Retail Pharmacy USA division.

SOURCES OF VALUE

Pharmacy Drugs sales in the U.S. is the biggest source of value for Walgreen Co., accounting for more than 50% of its total value.

Accessibility and affordability by virtue of largest U.S. drugstore network

Walgreen has the largest network of close to 8,200 pharmacy locations conveniently located within a five mile of nearly three-quarters of all Americans.

Walgreen's health service providers communicate face-to-face, on a personal level, with patients in ways to improve overall health care outcomes. Walgreen stores prove to be convenient, easily accessible and more affordable to its customers as a result of their significant scale and deeper penetration in the U.S. pharmacy market.

Poised to rake in higher sales than any U.S. retailer

Because of its strong market position Walgreen has over $800 in retail sales per square foot out of which prescription drug sales generate about $500 per square foot. This is higher than Wal-Mart's $400 sales per square foot.

Walgreens accounts for 16.9% of the retail prescriptions filled in the U.S. at present in 2018, and we expect its market share to increase in the future as Walgreens is expected to acquire Rite Aid and is poised to become one of the largest US retail drugstore chain.

Omni-channel retailing

Omni-channel retailing is the use of a variety of channels in a customer's shopping experience, including physical channels (offline) and digital channels (online). The emergence of onmi-channel retailing is resulting in a convergence of business models of both online and offline retailers. While traditional brick-and-mortar stores beef up interconnectivity with online shopping, e-commerce-only retailers are adding brick-and-mortar outlets to establish a physical presence.

This integrated strategy gives customers the opportunities to shop both online and offline at the same time through initiatives such as price matching and click-and-collect. Close to 20% of internet retail sales in the UK were estimated to be collected by customers in 2016.

This has been a focus area of Boots for quite some time now and the company continues to invest in enhancing the customer experience across channels.

Walgreen plans to accelerate its health and beauty omni-channel offering, with even more differentiated products and services tailored to meet rapidly evolving customer behaviors and expectations.

Expansion in emerging markets/ Latin America

Emerging markets represent a long-term strategic opportunity for Walgreens’ future growth. In 2014, Alliance Boots acquired Farmacias Ahumada which covers two main businesses, in Mexico and Chile, which together operate over 1,400 stores. This acquisition provided the company an entry into retail operations in Mexico and Chile. This move positions it well to eventually become an influential player in the Latin American market . The company also plans to bolster its presence in other emerging markets such as China and Brazil.

Cost cutting initiatives

In August 2014, Walgreens announced a three-year $1 billion cost-reduction initiative and later (in April 2015) announced that it has identified additional opportunities for cost savings, primarily in their Retail Pharmacy USA division. These additional cost opportunities are expected to increase the total cost-savings by $500 million, to a projected $1.5 billion by the end of fiscal 2017.

As a part of this initiative, the company plans to close approximately 200 stores (about 2% of the total count) across the country to reorganize corporate and field operations, and drive operating efficiencies. It also expects to generate some savings by streamlining information technology and other functions.

Some cost cutting will also be seen in the pharmacy international division. Boots, the name under which the company operates stores in the UK, announced that it will cut 700 back office roles as a part of the restructuring plan.

KEY TRENDS

Increasing demand and utilization of prescription drugs in the U.S.

The U.S. has an aging population, and as older people contribute to a larger proportion of expenditure on drugs (people above 60 spend an average 2-3 times more than those below 40), this will lead to an increase in the prescription drugs market in the U.S. The 2010 U.S. health reform legislation is also expected to increase prescription drug sales, as over 30 million uninsured Americans will gain coverage and the U.S. government will accordingly increase outlay on prescription drugs. This will be driven by an expansion of Medicaid and Medicare Part D plans.

Accelerating sales of generic drugs

Generic drugs offer approximately 50% higher gross margins compared to branded drugs. The total generic dispensing rate, which factors the percentage of generic drugs in a consumer’s prescription, grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. Generic drugs continued to replace branded drugs in 2015 and 2016, albeit at a slower pace.

In the last few quarters, Walgreens claims that the market has shifted from historical patterns of deflation in generic drug costs into inflation, a trend that is negatively impacting margins. The company has witnessed higher costs for a subset of generic drugs and in some cases the increase has been significant. Walgreens believes that generic drugs inflation will continue to negatively impact gross margins in the near term.

Walgreens is working to minimize the impact of inflation by tracking the movement of AWP (Average Wholesale Price), working with market participants to help them understand the importance of appropriate AWP adjustments to represent changes in actual drug costs, evolving its payer contracts to reflect the realities of an inflationary versus a deflationary market, and working through its joint venture with AmerisourceBergen (ABC) to secure better costs.