Walgreens Needs New Treatment Options

By WSJ City

Pharmacy giant Walgreens Boots Alliance has a slumping business and an ailing stock price. That much became clear Tuesday after Walgreens announced fiscal second-quarter results, writes Charley Grant for Heard on the Street.

KEY FACTS

   -- The company said its profit fell 14% to $1.16bn in the most recent 
      quarter. 
 
   -- Walgreens shares fell about 13% to $55.34 on Tuesday. 
 
   -- The stock is down 12% over the past year. 
 
   -- For 2019, Walgreens expects adjusted earnings per share at constant 
      currency rates to be roughly flat. 
 
   -- That's lower than its previous guidance for 7% to 12% growth.

"This has been a disappointing quarter and I am equally disappointed that we have had to reduce our guidance. We will respond quickly to ensure we return to growth," said Walgreens Chief Executive Stefano Pessina, in a call with analysts.

WHAT HAPPENED?

The chain said it made less money on prescription drugs, which drive the bulk of store sales. That's because tougher economics around generics drove prices lower. Also driving prices lower: pressure from insurers to reduce reimbursements to pharmacies.

Comparable retail sales were down primarily due to a weak cough, cold and flu season, the company said. Also playing a role in the decline were a drop in seasonable merchandise sales and a shift away from sales of products like tobacco. "We are going to be more aggressive in our response to these rapidly shifting trends," Pessina said.

ANALYSIS

Identifying what went wrong is easier than fixing it. Walgreens increased its target for annual cost savings to more than $1.5bn by fiscal 2022, up from $1bn, but arresting the stock-price decline will likely require a more ambitious plan, because the US payer environment is unlikely to improve. After all, its largest competitor, CVS Health , now owns a major health insurer and should be better positioned to handle reimbursement pressures.

The competitive environment could worsen still. Amazon bought online pharmacy PillPack last summer and could conceivably expand its pharmacy presence in the years to come. On the bright side, Walgreens's balance sheet is in decent shape, and its strategy of pursuing partnerships means it could do a large deal if it chose. Walgreens could even mimic CVS and try to merge with a major health insurer.

A fuller story is available on WSJ.com

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(END) Dow Jones Newswires

April 03, 2019 02:48 ET (06:48 GMT)

Walgreens Boots Alliance (NASDAQ:WBA)
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