Walgreens Braved Tough Industry Conditions To Post A Robust Q4 Fiscal 2017
Walgreens braved the tough challenges plaguing the pharmaceutical industry, such as low generic drug prices, the probable entry of Amazon into the pharmaceutical business, and currency headwinds to post a robust fourth quarter. Its revenues for the quarter grew by ~5% to $30.15 billion and its earnings per share rose by ~22% to reach $1.31. Both the estimates surpassed Wall Street analysts’ expectations. However, the company’s net income declined by 22% on account of the expenses borne due to the Rite Aid merger. Walgreens recent deal with Rite Aid gives Walgreens the option to buy 1,932 stores, three distribution centers, and other inventory from Rite Aid for an amount of around $4.4 billion in cash and other consideration. Rite Aid also will have the option to buy generic drugs at similar costs as Walgreens for 10 years through a Walgreens affiliate.
Segment-Wise Performance
Its retail pharmacy segment in the U.S. grew by 7.5% to $22.3 billion even though headwinds such as cheaper generic drug sales dampened its sales. The comparable store sales for the segment grew by 3% y-o-y. However, its retail pharmacy international sales declined by around 3% to $2.9 billion on account of currency headwinds. Its pharmaceutical wholesale segment grew by 1% to $5.4 billion.
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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.
Rite Aid Deal
In its deal with Rite Aid, Walgreens will be spending around $750 million for acquisition related costs such as integrating the stores, etc. It also plans to invest an additional $500 million in incremental capital expenditure towards store conversion and other such heads. Through this transaction, Walgreens expects to 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 has decided to close around 600 Rite Aid stores over an 18 month period beginning in spring 2018.
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