Thursday, April 07, 2016

Walgreens Boots Alliance Talks Pharmacy Margins, Beauty, Express Scripts, Valeant, and More

On Tuesday, Walgreens Boots Alliance (WBA) held its latest quarterly earnings call. (See links below for materials.)

Regular readers know that earnings calls can yield invaluable, on-the-record insights straight from a management team. In fact, after reviewing January’s WBA call, I speculated about a future WBA partnership with OptumRx months before it happened. (See the last line of that post.)

Below, I highlight and comment on the WBA management’s latest intriguing statements on prescription margins, the company's retail transformation, Express Scripts, generic inflation, Rite Aid’s EnvisionRx PBM, Valeant, and more.

One downside on the call: The WBA execs clearly demonstrated that they have mastered the art of the earnings call non-answer answer.


As always, I encourage you to read the original source material for yourself. Here are direct links to the information about Walgreens Boots Alliance’s second fiscal quarter of 2016:

Here’s a quote from the call’s opening comments of Stefano Pessina, WBA’s Executive Vice Chairman and Chief Executive Officer—and also the industry’s Global Channels Overlord (GCO):
”Consistent with our expectations we experienced a decline in Pharmacy gross margins, which were impacted by ongoing reimbursement pressure and changes in mix, including an increased contribution from Medicare Part D. As you know, the new Medicare Part D rates came into effect on January 1 this year….As we've said before, we continue to anticipate gross margin pressure in Pharmacy, but remain confident in our ability to grow the business over time.”
Pessina’s comments (and other statements on the call) illustrate the challenging math of narrow networks. Overall retail prescription growth remains below 2%, so pharmacies are trying to remain competitive and attract consumers in a saturated dispensing market. Consequently, pharmacies have been willing to accept reduced reimbursement rates (or pay fees) in exchange for participation in a preferred or limited network.

A reminder: In 2016, Walgreens is preferred in 13 major Medicare Part D prescription drug plans. See How the Eight Biggest Retail Chains (and Independents) Are Participating in 2016's Part D Preferred Networks and Chapter 7 of The 2016 Economic Report on Retail, Mail, and Specialty Pharmacies.

The Walgreens-OptumRx deal creates a similar dynamic. By becoming a preferred retail pharmacy partner for OptumRx’s PBM business, Walgreens gains incremental store traffic, albeit at a presumably reduced margin.

Here’s Alex Gourlay, Executive Vice President of Walgreens Boots Alliance and President of Walgreens:
“[W]e have been pretty clear that we want to drive more volume into pharmacies and we have been encouraged by what we have seen in Part D. And again, this season has gone well and therefore you should expect us to continue to drive our strategy in Optum.”
On the call, a few analysts gamely asked the management team for more details about the pharmacy margin environment. I found the non-answer answers vague and confusing, so I am not repeating them here.


Last April, Alex Gourlay stated that he wanted Walgreens to be “America's most-loved pharmacy-led health, well-being, and beauty retailer.” See my Analysis of its New U.S. Pharmacy Strategy.

They are following up on this strategy. Walgreens confirmed that it will be rolling out its beauty program to 1,600 stores by this fall. This should be no surprise. Recall that beauty products are a major focus for WBA’s Boots UK pharmacy chain. Spend a few minutes with My Visit to Boots UK: An International Pharmacy Photo Essay, featuring my lovely daughter, Audrey.

Here’s a fun fact: In its second fiscal quarter, prescriptions as a percentage of revenues declined in Walgreen’s retail pharmacy business. Check out the trend:
  • 2015, fiscal year ending August 31, 2015: 66.1% of revenues
  • 2016, fiscal quarter ending November 30, 2015): 68.4% of revenues
  • 2016, fiscal quarter ending February 29, 2016): 65.0% of revenues
Put another way, front-end sales grew at Walgreens’ stores.


1) Pessina on Express Scripts. Check out Pessina’s response to a question about the Optum relationship: ”We are very keen to create new partnerships and to have good relationships with as many companies and many people as possible and I don’t exclude that we could do similar things with other partners. Later, Pessina reiterated that the Optum arrangement wouldn’t preclude deals with other PBMs, adding “…I see the possibility of having very, very, very good relationship with Express Scripts.” Hmmm.

2) Generic deflation and specialty drugs. Gourlay confirmed that Walgreens is seeing “a slight deflation in generics” (consistent with The FDA Is Finally Ending Generic Inflation—and Hurting Wholesaler Profits) and “a slight slowdown in specialty” (consistent with our estimates in The Top 10 Specialty Pharmacies of 2015).

3) Options for the EnvisionRx PBM. Since the Rite Aid deal is not completed, Pessina wouldn’t offer much insight about future strategies for Rite Aid’s EnvisionRx business. But he did hint that Walgreens could build a niche version of CVS Health’s Maintenance Choice: “Secondly, even if we decide to develop it, I don’t see any difficulty because of course, we would not be a major competitor on the market and so we could find a niche, where we could collaborate and we could have a big collaboration as a pharmacy, pharmacy chain and maybe some niche or more limited collaboration on the PBM business.”

4) And of course…Valeant! On Valeant’s disastrous earnings call, CEO Michael Pearson said that Walgreens did a poor job explaining the Valeant-Walgreen program. (which I discuss in this December post and this January post.) Pearson later apologized, as explained in Fortune’s amusing Valeant to Walgreens: Hey, It's Not Your Fault After All. But even after Walgreens’ earnings release and Tuesday’s call, the company has still not explained how the Valeant arrangement affected revenues and profits. Of course, I have my suspicions.


P.S. By now, I hope you realize that last week's Buzzfeed post was an April Fool's joke, per Dana Scully's reaction at the end of the article. (And as far as I know, Kayne West has not actually tweeted about the 340B program.) I did, however, enjoy the congratulatory emails anyway. For another laugh, read some choice comments below the original post.

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