Dive Brief:
- Walgreens Boots Alliance posted increased profits ahead of its acquisition of drugstore retailer Rite Aid, a deal that executives expect to wrap in the second half of 2016.
- Walgreens' U.S. pharmacy sales grew 3.2% year-over-year in the company's second quarter ending Feb. 29. Walgreens blamed the slugglish growth on reimbursement pressures and a relatively weak flu season. Walgreens still reported a 14.4% increase in net earnings, which it credited to cost cuts and improved margins related to its ongoing integration with the U.K.’s Alliance Boots. The deal created the largest drugstore chain in the U.S. and U.K., with more than 13,200 stores in 11 countries.
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Walgreens Boots Alliance now awaits a regulatory decision on its Rite Aid acquisition. CEO Stefano Pessina, already known for his appetite for deals, has said that the U.S. drugstore market is ripe for consolidation and that there may be more deals in store for the company. “There is plenty more to do,” Pessina told analysts on Tuesday's 75-minute earnings call, according to Forbes.
Dive Insight:
Much of the consolidation in the drugstore retail business in the past several years has been driven by market forces shaped by the Affordable Care Act. Pharmacy benefits companies have merged with drugstore retailers, which are expanding medical clinic services.
As one segment of the industry gains clout through consolidation, another must too, in order to retain bargaining power. Independent pharmacies, which often have “Main Street” locations, are free of corporate decoration, and have served local communities for years—although even those businesses have morphed. You don’t see soda shops in them anymore, for example.
So much of the consolidation has been driven by changing incentives brought on by the ACA in an effort to drive down U.S. healthcare costs that had been reaching absurd proportions for both employers and workers. In this environment, regulators have taken steps to try to ensure that acquisitions won’t actually drive costs up for consumers.
And that presents a pickle for a company like Walgreen Boots Alliance. If the focus of its cost-cutting and acquisitions is “boldness” that serves investor returns more than innovation, it may falter in the long run.
With the inherent goal of the ACA to bring sanity to burgeoning medical costs to consumers, there simply will be fewer profits to be had. Those that are there to be had must be won through innovation and good customer care—capitalism at its best.
“From mid-2012 through mid-2015, Walgreen shares more than doubled in value, a healthy run driven by earnings growth and multiple expansion. At their recent peak, the shares fetched more than 22 times forward earnings,” the Wall Street Journal’s Steven Russolillo notes. “But as the stock has stagnated and earnings forecasts have declined, the multiple has compressed. And, for all the company’s moves, it is tough to see them bearing the kind of fruit that would immediately change that.”
That’s true, but is that really why Walgreens Boots Alliance is in business? CVS Health, which has made moves similar to Walgreens (buying Target’s pharmacy business and prescription-drug fulfillment company Omnicare Inc., for example) has also made other moves. Most notably, it left $2 billion on the table when it opted to stop selling tobacco products. That move hasn’t taken as much of a chunk out of CVS’s results as some had predicted, and it has allowed the company to pivot to an all-around healthcare and beauty company that it can market to consumers with a straight face.
That’s what you might call “bold.”