Walgreens Boots Alliance (NASDAQ:WBA)
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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 email@example.com and Joseph Walker at firstname.lastname@example.org
(END) Dow Jones Newswires
April 03, 2019 02:47 ET (06:47 GMT)
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