Wednesday, June 25, 2014

Yes, Walgreens is Seriously Considering Inversion

My, my, how things have changed.

Yesterday, Walgreens released its latest quarterly earnings. President and CEO Greg Wasson has now completely reversed his public tone on tax inversion regarding Alliance Boots. Read his comments below and see what you think.

Putting aside the politically fraught inversion issue, Walgreens' financial picture gives us a valuable glimpse into the pharmacy industry's changing economics. Despite some good news on Alliance Boots synergies, gross margins were pulled down due to generic reimbursement pressures. (A-gain?) I highlight a key comment below, but you should really read the entire transcript.

Walgreens withdrew its 2016 guidance and now plans to update everyone in late July/early August. We'll all be waiting for Wasson to pull a rabbit out of his hat. Presto!

As of February 2015, Walgreens will have the option to acquire the 55% of Alliance Boots that it doesn't own. Here are the two most recent Drug Channels articles on the Walgreens-Alliance Boots tax inversion issue:
Here's what Wasson said yesterday (transcript)
"I think as I said we’re certainly analyzing all the moving parts that will lead us to certainly our decision on the timing the structure of step 2 and so it's difficult to kind of break those apart and talk more of a piecemeal. I'll say as we had said that we’re looking at all and everything. We’re looking at everything from what the timing, best timing would be, what the capital structure should be, what our tax structure or what the structure could do to as far as our effective tax rate...We are working around the clock to try to understand all the above so that we’re able to make the right decision for the company."
Hmmm, quite a shift from the previous quarter, when Wasson emphatically stated: "[W]e have no plans to do so, to do an inversion or redomicile the company." (transcript) Amazing what happens when shareholder value takes precedence over managements' desires.

EVP, CFO and President, International Wade Miquelon summarized Walgreens' margin pressures as follows:
"The primary drivers of the pharmacy margin decrease were increasing third-party reimbursement pressure, particularly due to a few contract step downs, increases in Medicare Part D mix including the strategy to continue driving 90-day prescriptions at retail, fewer generic drug introductions versus the year-ago and pronounced generic drug inflation on a subset of generic drugs as well as the mix from specialty drugs."
The call had many great analyst questions that focused on unpacking Wade's statement. Long time Drug Channels readers will not be surprised by the answers. See "The Changing Generic Marketplace" (starting on page 129 of 2013–14 Economic Report on Retail, Mail, and Specialty Pharmacies), in which I analyze the rising pressure on generic profits.

I look forward to the July/August call. I presume its theme will be: "And now, here's something we hope you'll really like!"


  1. It's a mid-term election year in Congress. If THIS tax inversion case doesn't garner Conservatives' attention up on Capitol Hill, then nothing will. Frankly, I'd been hoping that POTUS's Corporate Tax Reform push picks up interest, since the well-practiced Foreign Policy Rope-A-Dope for a second term President isn't going too well.

    Walgreen's advertising is in baseball stadia all over the US. Can you see pundits taking aim at Mr. Wasson's trial balloon?

  2. Fun to watch them twist in the wind on the tax inversion issue. Fascinating stuff, and your point about shareholder value vis-à-vis management wishes is dead on. On another note, your article included a quote from the CFO saying they are continuing to drive 90-day retail, and I thought inferred that this was putting some downward pressure on margins (as it would, compared to 30-day retail). Per our previous emails, did you ever hear anything more on that topic? Thanks.

  3. Walgreens predicted the 90-day profit hit back in March 2011. See this Drug Channels article: Walgreen Talks PBM Conflicts, 90-Day Rx Profits, and AMP. At the time, I summarized the situation as follows:

    Walgreen has to sacrifice profitability by accepting mail reimbursement rates.

    However, Walgreen is able to get a slight premium above mail rates because of (1) consumer convenience, and (2) improved adherence.

    Walgreen has a lower average cost of dispensing for one 90-day fill versus three 30-day fills, although there is an as-yet-unquantified loss of front-end revenue.