Walgreens’s Deal Aversion Can’t Last

CVS Health Corp. wasn't frequently mentioned on Walgreens Boots Alliance Inc.'s first quarter earnings call Thursday.

But CVS's $69 billion deal for insurer Aetna Inc. loomed large as Walgreens reported mixed results – it beat analyst revenue estimates, but profit fell 22 percent from a year earlier due largely to an impairment charge. Shares fell as much as 6 percent percent Thursday morning.

Like CVS, Walgreens is trying to transform itself, but without a splashy deal. But unless its more modest efforts pay dividends soon, such ambition may be pushed upon it. 

Falling Behind

Walgreens shares fell a good ways behind the broader market in 2017

Source: Bloomberg

Walgreens's pharmacy business is the key to its U.S. performance. Comparable-store pharmacy sales grew by 7.4 percent in the quarter. Retail sales fell by 0.9 percent, the sixth straight quarter of decline. The company's acquisition last summer of Rite Aid Corp. stores will help boost growth of both pharmacy and retail sales in the year to come.

But regulatory intervention meant the Rite Aid deal was for a smaller number of stores than Walgreens hoped. And it likely marked the end of the company's ability to substantially expand its pharmacy and retail footprint in the U.S.

Problems Up Front

Walgreens has had a hard time growing non-pharmacy sales

Source: Bloomberg

Neither Walgreens nor CVS can rely on torrid prescription growth forever. And retail success will be tough to achieve in an increasingly difficult environment for everything brick-and-mortar. Amazon.com Inc., already a competitor in retail, is reportedly considering getting into the pharmacy business too. 

CVS's deal is a bet on providing more health care and squeezing more out of its pharmacy business. It's risky; CVS could alienate Aetna customers if it's too aggressive in pushing its own services, and it may irk competing insurance companies served by its pharmacy benefit management arm. CVS will have to take on a bunch of debt, which will constrain needed investment into expanding in-store clinics. 

But the rewards could be substantial. Aetna enrollees are a large captive market for CVS offerings. Health care is increasingly moving away from traditional points of service and toward this kind of retail setting. And the combined company will have a stronger defense against Amazon, which isn't about to open clinics or start insuring people.

Walgreens is taking a different tack. CEO Stefano Pessina said on Thursday's call that he thinks partnerships — such as those it has with distributor AmerisourceBergen Corp. and lab-testing service Laboratory Corp. of America Holdings — are just as valuable as acquisitions.

Meanwhile, the company is focusing on geographic diversification and revamping its stores, with pilot programs testing new approaches to everything from its supply chain to beauty offerings.

While that approach is cheaper than an Aetna-style deal, there's arguably a ceiling on the benefits it can deliver. It's unlikely that even a radical, rapid, and flawlessly executed store redesign could do much to stop the general shift toward buying things elsewhere and online — let alone counter a more aggressive Amazon entry. 

Don't expect Walgreens to stick to limited partnerships and internal reinvention for too much longer.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    Read more: http://www.bloomberg.com/news/articles/2018-01-04/walgreens-earnings-it-can-t-avoid-deals-forever

    CVS-Aetna Deal Could Mean End of Era in How Drugs Are Paid For

    If Aetna Inc. is eventually swallowed by CVS Health Corp., an important part of the health-care business will be changed — perhaps for good.

    For years, pharmacy benefits were largely carved out from the rest of a medical coverage plan. But increasingly the two services are being combined, a move that in theory will make it easier to verify whether expensive drugs are worth the cost. A merger of the third-biggest health insurer with the largest U.S. drugstore chain, which also operates a pharmacy-benefit management company, could speed the process.

    “You are hearing the warning for the end of the road for the classic standalone” pharmacy-benefit business, said Pratap Khedkar, managing principal at consulting firm ZS Associates.

    Drugmakers are producing more pricey treatments for cancer and rare diseases. Combining drug and medical benefits in the same place is “the only way” payers will figure out whether such expensive new drugs are actually making people better and saving money by keeping them out of the hospital, he said.

    A merger of CVS and Aetna would create a health-care behemoth and put huge pressure on standalone players such as Express Scripts Holding Co. and Walgreens Boots Alliance Inc. Express Scripts would become the last major standalone pharmacy-benefit manager not allied with a major insurer. 

    All Channels

    CVS and Aetna have held discussions about a potential deal, according to people familiar with the matter who asked not to be identified as the details aren’t public. A newly combined company would “own the entire chain, from prescribing and filling prescriptions to the health plans that pay for them,” said Michael Rea, of Rx Savings Solutions, which has an app that helps patients find lower cost drugs.

    Under a combined roof, the insurance arm of CVS-Aetna could help keep costs down by routing patients needing basic urgent care to CVS-owned walk-in clinics and keeping them out of expensive hospital emergency rooms, analyst Ann Hynes of Mizuho Securities said in a note to clients. The company would also become a formidable competitor to UnitedHealth Group Inc., the biggest health insurer and owner of its own PBM unit, OptumRx.

    But even with the new clout, a merger isn’t likely to be derailed by federal antitrust authorities, said John Briggs, an antitrust attorney at Axinn Veltrop & Harkrider in Washington.

    CVS and Aetna declined to comment.

    Walgreens, the No. 2 drugstore operator, could also feel the pressure. A CVS-Aetna marriage could cause the drugstore chain to look for its own acquisition targets, with Express Scripts being the most likely, Charles Rhyee, an analyst at Cowen & Co., wrote in a note to clients Friday.

    And then there’s Amazon.com Inc., which recently gained drug-wholesaler licenses in 14 states. The looming threat of the e-commerce behemoth entering the mail-order pharmacy business and pushing down profit margins for drug distributors, benefit managers and retail pharmacies intensifies the pressure on standalone players.

    For CVS, the move is “a natural defense against the potential threat of Amazon entering the retail pharmacy market,” Rhyee said.

    Another possibility is that Amazon could buy Express Scripts. That would give the internet retailer an instant and large foothold in both the PBM industry and the mail-order pharmacy business.

    ‘Strong’ Model

    Health insurer Anthem Inc., Express Scripts’ biggest current client, announced earlier this month that it would leave Express Scripts when its contract ends at the end of 2019 to form its own PBM unit. And Prime Therapeutics, another major player, manages drug benefits for nonprofit Blue Cross and Blue Shield plans in numerous states.

    “Our model is strong and thriving,” said Jennifer Luddy, a spokeswoman for Express Scripts. “We believe in the value that we provide to our customers as an independent PBM.”

    On an earnings call this week, Express Scripts Chief Executive Officer Tim Wentworth said he was open to a deal with Amazon to help serve cash-paying patients.

    Walgreens declined to comment.

    In terms of the CVS-Aetna deal, antitrust authorities will look closely at the competition between the companies in selling Medicare Part D plans for the elderly, said Briggs, the attorney.

    There could be fight between the Justice Department and the Federal Trade Commission, which share antitrust enforcement, over which agency will investigate the merger, according to Briggs. The Justice Department handles insurer mergers and successfully stopped the combination of Aetna and Humana Inc. this year. The FTC investigates retail pharmacy deals. In September, it cleared Walgreens’ acquisition of 1,900 Rite Aid Corp. stores after Walgreens shrank the size of the deal.

    Still, a CVS-Aetna deal would likely win approval because a number of other major players will remain in the Part D market, he said.

    “That’s an easy fix,” Briggs said. “The whole deal is not going to crater on account of Part D.”

      Read more: http://www.bloomberg.com/news/articles/2017-10-27/cvs-aetna-deal-could-mean-end-of-era-in-how-drugs-are-paid-for