Walgreens stock lost more than 32%, dropping from $60 at the beginning of 2020 to below $41 in late March 2020. It then moved higher to $56 in June 2021 before falling again to $26 levels toward the end of 2023. It currently trades at around $20 (early April 2024). That means it is still lower than the levels it saw in January 2020. Why? Walgreens faced challenges with its international business, which has weighed on its earnings over recent years. Also, investors are concerned about the loss of market share to Amazon, which has also entered the online pharmacy business.
Along with this comes the threat from bigger entities like Amazon, which have entered the pharmaceutical supply chain. However, Walgreens' deal with Rite Aid gives it leverage to grow its presence further in the domestic market. The addition of Rite Aid stores has given Walgreens an edge over one of its biggest competitors, CVS.
U.S. Pharmacy Sales: Total Pharmacy revenue from the U.S. has increased from $77.3 billion in 2019 to $80.4 billion in 2022. The growth over the recent past was partly driven by the Covid-19 vaccine administration at Walgreens stores. However, total revenue declined in mid-single-digits in fiscal 2022 as the demand for the Covid-19 vaccine declined. Looking forward, we forecast a rise in sales led by steady growth in overall prescription volume to levels north of $94 billion by the end of our review period in 2029.
However, if the company is able to fill more prescriptions over the coming years, taking the total revenue north of $110 billion by the end of our review period, there could be around 20% upside to our current price estimate.
Walgreens EBITDA Margin: We currently forecast EBITDA margins for prescription drug sales to rise slightly over our forecast horizon, from 3.0% in 2022 to 6.5% by the end of our review period. This increase is largely expected due to higher pharmacy margins resulting from an increase in drug sales, cost savings resulting from Walgreens' store optimization initiatives, and greater buying power. However, if margins stay close to 5%, 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 25% downside to the Trefis price estimate.
On the other hand, if the company manages to improve its margins more than our estimate, with levels of over 8% by the end of our review period, it will result in an upside of 25% for our price estimate of Walgreens.
Walgreens 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, and seasonal merchandise). In addition to its store offerings, Walgreens provides pharmacy services like prescription fulfillment through mail orders, telephone, and the 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 (the largest drugstore chain in the U.S.), Boots (market leader in retail pharmacy), and Alliance Healthcare (a leading pharmaceutical wholesaler and distributor).
Walgreens presently operates one of the largest networks of close to 9,000 locations across the U.S., with over 78% of the U.S. population living within a five-mile radius of a typical Walgreens retail store and close to 4,000 locations internationally, and has stores located in the United Kingdom, Mexico, Chile, Thailand, Norway, the Republic of Ireland, The Netherlands, and Lithuania.
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 toward store conversion and other such heads. Through this transaction, Walgreens will realize 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 decided to close around 600 Rite Aid stores over an 18-month period beginning in spring 2018.
In June 2012, Walgreens 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 an increase in debt (~$11 billion). Nonetheless, Walgreens saw 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, Walgreens secured financing to close the transaction, as well as refinance the majority of Alliance Boots' outstanding debt, and completed the acquisition in December 2014.
However, the acquisition didn't turn out to be great for Walgreens, as the UK business was hit hard due to stiff competition by online retailers.
In March 2013, Walgreens 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. Walgreens currently distributes more than 80% of its own drugs but over time most (if not all) of that distribution will be handled by AmerisourceBergen.
In June 2021, Walgreens sold its Pharmaceuticals Wholesale business to AmerisourceBergen in a deal valued at $6.5 billion.
In July 2012, Walgreens 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 the mid-Southern United States.
Walgreens' Wholesale segment was formed in November 2020 with McKesson Corporation in Germany. Walgreens owns a 70% controlling equity interest in the combined business.
Pharmacy Drug sales is the biggest source of value for Walgreens, accounting for more than 65% of its total value.
Walgreens has the largest network of close to 9,000 pharmacy locations conveniently located within a five-mile of nearly three-quarters of the entire U.S. population.
Walgreens' health service providers communicate face-to-face, on a personal level, with patients in ways to improve overall health care outcomes. Walgreens 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.
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 omnichannel 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 allows customers to shop both online and offline at the same time through initiatives such as price matching and click-and-collect. 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.
Walgreens 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.
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.
Walgreens in 2017 announced its Store Optimization Program, aimed to optimize store locations through the planned closure of hundreds of stores in the U.S. The Company closed 769 stores and related assets between 2018 and 2020.
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 of 2-3 times more than those below 40), this will lead to an increase in the prescription drugs market in the U.S. The U.S. health reforms are also expected to increase prescription drug sales, as millions of 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.
