Thursday, October 01, 2009

Walgreen's Future Profit Potential

Walgreen (NYSE:WAG) posted better than expected sales and announced major progress in its cost-cutting efforts, leading its stock to pop about 10% on Tuesday. Here’s the official release: Walgreen Co. Reports Fourth Quarter 2009 Earnings of 44 Cents Per Diluted Share

Walgreen’s strategic moves are in sync with two important industry trends that I analyze in my (hint, hint) new U.S. Pharmacy Industry: 2009 Economic Report and Outlook:
  • The growing advantage of low-cost prescription fulfillment
  • The expansion of channel-neutral dispensing models
Both factors—dispensing efficiency and integrated models–also position Walgreen's for more cost-plus deals a la Caterpillar/Walgreens/Wal-Mart.


Last week, I highlighted Wal-Mart’s view that dispensing services for many maintenance products should be priced as a commodity. See Wal-Mart Explains Its Healthcare Strategy.

Cost leadership is a key strategy for winning in a commodity market.
Walgreen is positioning itself to succeed as a low-cost prescription fulfillment provider while also differentiating itself as a one-stop solutions provider. Walgreens Rewiring for Growth program is taking significant costs out of the business without any apparent loss of service.

I’m also keeping a close eye on Walgreen’s POWER initiative, which attempts a best-of-both worlds dispensing strategy. POWER combines the central-fill efficiencies of mail-order pharmacies with in-person consultation from pharmacists in a retail setting. POWER is one factor behind the impressive inventory reductions reported.

I also see that Walgreen grew same-store prescription sales by 4.5% in the quarter ending August 31. It’s well-known that larger, more active pharmacies have lower average costs of dispensing. (See Exhibit 21 in you know where.) Pharmacies with lower costs of dispensing will be better able to operate with lower levels of reimbursement than higher cost pharmacies.


Walgreens also announced a new effort to shift 90-day maintenance scripts from mail-order into a retail store format, a trend being encouraged by both CVS Caremark and Wal-Mart. This is not really new because Walgreen’s Advantage90 program launched in 2003. But the renewed emphasis connects to the low-cost story and an emerging challenge facing Pharmacy Benefit Managers (PBMs).

See Walgreens Launches National Initiative for 90-Day Prescriptions at Community Pharmacies, which states:
“As part of this program, Walgreens pharmacists will work with patients, physicians, insurers, employers and managed care organizations to implement a comprehensive 90-day at retail prescription program for maintenance medications including, where appropriate, the conversion of traditional 30-day chronic care prescriptions into 90-day prescriptions.”
Big Picture: Convergence within the pharmacy business is creating channel-neutral dispensing models.

As I note in The Impact of Walmart's National Mail Pharmacy, Walmart and CVS Caremark (with Maintenance Choice) are now both pursuing strategies that eliminate the traditional out-of-pocket cost difference for consumers and payers between mail and store-based pharmacy. On the conference call, Walgreen’s highlighted its reluctantly launched Prescription Savings Club as another factor driving the shift to retail.

This dynamic will affect PBMs, which rely heavily on mail-order profits to fund other activities. I forecast that growth in mail-order prescriptions will lag some other channels because of increased competition from retail store-based pharmacies. See Exhibit 15 in...wait for it... my new report.

  • I heard some very intriguing hints about the future WAG-CAT network structure on the earnings call. If you purchased the U.S. Pharmacy Industry: 2009 Economic Report and Outlook, compare Walgreen’s CFO Wade D. Miquelon’s responses on the call to pages 42-44 in my new report.

  • Walgreen’s projected a “worst case” impact of $80 to $90 million from the AWP rollback. Similar to my comments in AWP Goes Boom, the biggest impact will be from state Medicaid programs, not the commercial market.

  • You may have noticed a few subtle hints regarding my new report. If you haven't yet broken down and purchased it, check out the Table of Contents to get a better sense of what's inside. Sales so far have been really strong, so you should at least know that your competitors and many industry analysts/strategists are already reading it.


  1. I don't know about subtle, Adam!

    I got the report yesterday and think it's outstanding. Thanks for putting it together. I'll be using it with my trade team for training.

  2. Where can I get a transcript of the earnings call?

  3. You can listen to the earnings call here.

    You can read the transcript here.


  4. Adam,

    In my opinion, if an independent pharmacist had to work for a chain...this one would be it. Although you are a bottom line kind of guy and pharmaceuticals happens to be your commodity of is VITAL for the top of the food chain to pay attention to what is happening at the bottom! Your frontline people are your best bet to saving and making your buck...slow and steady! You'd be amazed at how much business they turn away! The grunt work always ends up at my husband's door. You can only shaft people for so long(CVS/Caremark and soon to be Walmart). Walgreen reps used to come to my father-in-law and and ask him "Are ready to sell?" and he would always reply "No...Are you?". They were always respectful and honest...they would do well to stay that way! Walgreen's original owner followed the Rotary 4-way test.

    Providing good service with your commodity at the best possible price. That's the company to watch!

  5. Interesting perspective. Now that I think about it, I rarely hear CEOs of big chains discuss the role and importance of pharmacists in implementing business strategy.

    OTOH, pharmacists are the single biggest labor expense for any pharmacy, so there is enormous pressure to substitute capital for labor (via automation and central fill). This will become even more important as the generic dispensing rate goes up.

    Thanks for this comment.


  6. are quite welcome...I think?

    Pharmacists are more than pill pushers and any chain hiring one exclusively for that purpose is simply not getting their money's worth! I wouldn't expect you to understand exactly what a 6 year degree in pharmacy prepares you to do... but I am hopeful Walgreen's does at some level....or am I?

    Some chain pharmacists work hard for thier company and serve them well...Still, others really don't care how many scripts they's not their business and as long as their pay, benefits and 401K are in tact they don't complain much. That is...they don't complain until the long hours and boredom catch up with them. That's when they look to another chain with a slightly more appealing offer. If filling the script is too hard or requires a phone call they send the business away...You'd be amazed! Pharmacists who take their jobs for granted be'll be out of a retail job if you can't justify your are expendable.

    We do agree...pharmacists are the biggest labor expense...however, they can be your biggest money draw! It is your frontline that remains closest to the pulse of your consumer. In the end, I have to believe he who is able to capitalize and execute a response to that pulse the fastest and at the best possible price WITH THE BEST POSSIBLE SERVICE/PRODUCT will sustain its profits over the long haul. Chains are too slow and mailorders can't seem to do it without being dishonest. In addition, they can't possibly sevvice their customers appropriately 24/ they are beginning to realize.

    The consumer is getting weary of not being heard by the CVS/Caremarks and Walmarts. They don't want to see the savings in their portfolios. (What portfolios!!!!great for you and those at the top....for now...think ENRON) They want to see that savings at the time of the sale. In addition...consumers do not like to buy products sight unseen and once they've been burned by mailorder or the Merril Lynch's in this world and are at the mercy of someone like my husband, they are customers for life. Unfortunately for Merril Lynch they don't reap the rewards from our portfolio. It is hard earned, fair, honest and has been built over a long stretch of time. Someone more local gets our business and has done quite well for us!

    BIG companies should find ways to operate intimately with their consumers again...That takes a small business mentality...Consumers are are not seeng any value in the so called "savings" any more (as if they really ever did). The Wharton School may have sold you short... I have to believe that "virtual" companies selling "virtual" products with "virtual" service are destined to crash and burn. How uncreative!!!! Run with your money while the running is good. Ethics and honesty that accompany a useful product at a decent price... a product that has somewhat of a shelflife to it again...and that is returnable if it breaks after 30 days without a restocking fee...there is where the future profit lies. It's time for the pedulum to swing back.
    Many large corporations began with the vision of a simple man. Current CEO's would be wise to revisit that vision with 21st century spectacles.

  7. Sorry for the mind was running faster than my fingers...In addition, my abilities are in other resource management. Wouldn't Walgreens LOVE to hear my trade secrets! CVS/Caremark/Walmart managers wouldn't's beneath their paygrade.

    Have a nice evening.