Walgreens, CVS shares fall as profit shrinks on high-volume
sales of unbranded medication
By Sharon Terlep and Joseph Walker
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 3, 2019).
Smaller profit from the sale of generic drugs is squeezing the
two biggest U.S. pharmacy chains, with Walgreens Boots Alliance
Inc. joining rival CVS Health Corp. in lowering earnings goals for
the year.
Walgreens cut its forecast on Tuesday after experiencing what
the company described as its most difficult quarter since the 2014
merger of Walgreens and Alliance Boots. Its shares fell 13% on
Tuesday, while CVS lost 3.8%, extending a slump dating to late
February when the drugstore chain lowered its 2019 profit
target.
Walgreens and CVS are getting squeezed as they negotiate with
pharmacy-benefit managers. PBMs, as they are known, serve insurers
and other clients by choosing which medicines to cover and wresting
lower prices from both makers and sellers of drugs. Although CVS
owns one of the country's biggest PBMs, Walgreens doesn't, leaving
it more exposed to pricing demands.
"The pharmacy trends are not only impacting our business,"
Walgreens CEO Stefano Pessina said Tuesday on a conference call.
"They are impacting the overall market and will likely continue to
do so over the coming months."
The prices that pharmacies like Walgreens pay for generic drugs
has been falling, but not as fast as insurers' reimbursement rates,
said Ross Muken, an Evercore ISI analyst. The shrinking gap between
the price Walgreens pays and the amount it receives after
dispensing the drug is reducing the company's profit margins, he
said.
U.S. politicians from both parties -- including President Trump,
a Republican -- have vowed to lower prescription drug prices. List
prices for branded drugs continue to rise, though at slower rates
than in previous years, while prices for generic drugs have been
falling for years.
Generic drugs account for about 85% of U.S. prescriptions, and
are generally more profitable than high-price branded drugs like
arthritis treatment Humira or Xarelto, a blood thinner.
In buying generics, pharmacy chains can leverage their
purchasing power to negotiate lower prices when there are multiple
manufacturers competing for the business. And even if profits from
each generic prescription are small, they can add up quickly given
the high volume.
CVS in February lowered its earnings outlook for 2019, its first
full year after buying insurer Aetna Inc. The chain blamed in part
smaller benefits from the rollout of new generic drugs, as well as
the performance of Omnicare, its long-term-care pharmacy
business.
In its pharmacy-benefits business, CVS said it was experiencing
a squeeze related to the rebates that it receives from drugmakers
and passes on to clients, such as self-insured companies. It has
guaranteed clients that it will provide them certain rebate
payments, but at the same time CVS is seeing slower growth than it
had expected in the list prices of branded drugs.
"Many of these headwinds are transitory in nature," CVS Chief
Executive Larry Merlo told investors at the time.
The weak performance from the two drugstore chains "demonstrates
that there is no relief in sight from reimbursement pressure
permeating throughout the pharmacy retail sector," Moody's Vice
President Mickey Chadha said.
To cut costs, insurers have been channeling patients toward
limited pharmacy networks that in exchange for the retail business
agree to lower reimbursement rates.
Walgreens said its profit fell 14% to $1.16 billion in its
fiscal second quarter ended Feb. 28. Mr. Pessina called the
quarterly results disappointing and there was "no excuse" for
Walgreens' performance. "We will respond quickly to ensure we
return to growth," he said.
The CEO defended the company's strategy to grow through tie-ups
with other companies. Walgreens has struck about a dozen
partnership deals in the past couple of years with companies,
ranging from LabCorp to Microsoft Corp., in a bid to increase
pharmacy revenue and get customers to make other in-store
purchases.
Mr. Pessina said the deals have yet to bolster profitability
both because they are still new and because Walgreens continues to
invest in new pairings. "You don't see the benefit for the time
being," he said. "The investments will mature."
For fiscal year 2019, Walgreens now expects adjusted earnings
per share at constant currency rates to be about flat, lower than
its previous guidance for 7%-to-12% growth.
For the recent quarter, Walgreens said sales rose 4.6% to $34.53
billion as the company continues integrating the roughly 1,900
stores it acquired last year from rival Rite Aid Corp. U.S. retail
pharmacy sales rose 7.3% to $26.3 billion, due in large part to
higher prescription volumes from the additional stores. The company
said a challenging U.K. consumer market hurt results for its Boots
division.
Comparable retail sales companywide were down 3.8% in the
quarter, primarily due to a mild cough, cold and flu season, the
company said. Also contributing to the decline were a drop in
seasonal merchandise sales and a shift away from the sale of
tobacco products.
Walgreens has been testing tobacco-free stores in the U.S.
because of pressure from federal regulators, activists and some
investors. But Mr. Pessina said in a recent interview that the
chain has no plans to stop selling all cigarettes, as CVS did in
2014. After the disappointing quarter, Walgreens said it would ramp
up its cost-cutting efforts.
It plans to reduce annual spending by $1.5 billion by fiscal
2022, up from plans in December to eliminate $1 billion in annual
costs.
"We are going to be more aggressive in our response to these
rapidly shifting trends," Mr. Pessina said.
--Aisha Al-Muslim contributed to this article.
Write to Sharon Terlep at sharon.terlep@wsj.com and Joseph
Walker at joseph.walker@wsj.com
(END) Dow Jones Newswires
April 03, 2019 02:47 ET (06:47 GMT)
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