Walgreens Boots Alliance (NASDAQ:WBA)
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By Sharon Terlep and Joseph Walker
Shrinking profits from the sale of generic drugs are weighing on the country's biggest pharmacy chains.
Walgreens Boots Alliance Inc. on Tuesday cut its earnings forecast after facing what the company described as its most difficult quarter since the 2014 merger of Alliance Boots and Walgreens. The news, which sent Walgreens shares tumbling, comes weeks after rival CVS Health Corp. lowered its profit targets for the year.
Walgreens and CVS are getting squeezed as they negotiate with pharmacy benefit managers, which choose which drugs to cover and wrest lower prices from drugmakers through rebates. Although CVS owns one of the country's biggest PBMs, Walgreens doesn't, leaving it more exposed to onerous 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 rates that insurers pay pharmacies for generic drugs are falling faster than the prices that pharmacies like Walgreens buy them for, said Ross Muken, an Evercore ISI analyst. The shrinking gap between the prices Walgreens pays and receives is reducing the company's profit margins, he said.
U.S. politicians from both parties, including President Donald Trump, have vowed to lower prescription drug prices. List prices for branded drugs continue to rise, though at slower rates than in previous years. Prices for generic drugs, which account for about 80% of U.S. prescriptions, have been falling for years.
Generics are generally more profitable for pharmacies than high-price branded drugs like Humira or Xarelto. Pharmacies buy drugs in bulk aiming to resell them at a higher price.
The pricing pressures facing Walgreens, analysts said, are similar to the ones that led CVS in February to issue a disappointing earnings outlook for 2019, its first full year after buying insurer Aetna Inc. CVS said its results were being hurt by smaller benefits from the rollout of new generic drugs and the performance of Omnicare, its long-term-care pharmacy business.
In its pharmacy-benefits business, CVS said it was experiencing a squeeze related to rebates that it receives from drugmakers and passes on to clients. It has guaranteed clients that it will provide them certain rebate payments, but CVS is seeing slower growth than it had expected in the prices of branded drugs.
"Many of these headwinds are transitory in nature," CVS Chief Executive Larry Merlo told investors in a February earnings call.
The weak performance from the two companies "demonstrates that there is no relief in sight from reimbursement pressure permeating throughout the pharmacy retail sector," Moody's Vice President Mickey Chadha said.
Walgreens shares were off about 12% at $56.09 Tuesday afternoon. Shares of CVS, which tumbled in February when it lowered its profit goals, fell 3% to $42.59 on Tuesday. The stocks are down 14% and 33%, respectively, over the last six months.
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 from LabCorp to Microsoft Corp. in a bid to increase pharmacy revenue and get customers to make other in-store purchases.
He 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, Mr. Pessina said. "The investments will mature."
For fiscal 2019, Walgreens now expects adjusted earnings per share at constant currency rates to be roughly 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.
Comparable retail sales were down 3.8% in the quarter, primarily due to a mild cough, cold and flu season, the company said. Also playing a role in the decline were a drop in seasonal merchandise sales and a shift away from sales of tobacco products.
The company has been testing tobacco-free stores in the U.S. due to pressure from federal regulators, activists and some investors. But Mr. Pessina said in a recent interview that Walgreens has no plans to stop selling all cigarettes, as CVS did in 2014.
After the disappointing quarter, Walgreens on Tuesday 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 firstname.lastname@example.org and Joseph Walker at email@example.com
(END) Dow Jones Newswires
April 02, 2019 14:06 ET (18:06 GMT)
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