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 sharon.terlep@wsj.com and Joseph
Walker at joseph.walker@wsj.com
(END) Dow Jones Newswires
April 02, 2019 14:06 ET (18:06 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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