PHARMACIST STEVE

Walgreens’ Woes: Retail Pharmacy Giant Reportedly Weighing Private Equity Sale to Sycamore Partners

https://www.doximity.com/collections/890523eb-6a52-412a-8533-fb6bbf3abd1b

After a tumultuous run which included making major investments into healthcare delivery assets (most notably VillageMD), Sycamore Partners is reportedly taking Walgreens private as scooped by the Wall Street Journal.

In November, Walgreens parted ways with VillageMD CEO Tim Barry.

It has been a tough few years for the beleaguered retail pharmacy player, and Walgreens has been brought to its knees in 2024. The knockout punch was coming. How did we get here?

Walgreens has been hit hard by uncontrollable secular shifts in consumer behavior. Amazon and others are eating Walgreens’ retail lunch.

The retail side of Walgreens’ business is stagnant and oversaturated with stores, as more consumers shift to online shopping. This challenge is two-pronged. The pharmacy business traditionally operated like a “gas station” model—drawing foot traffic that would lead to retail sales. But as patients increasingly choose online prescription refill services for convenience, fewer people are visiting physical pharmacy stores, resulting in decreased retail shopping at these locations.

So when retail sales sagged, Walgreens needed to make a move in a big way. The big plan involved embarking on an ambitious business transformation journey into healthcare delivery .

This journey jump-started in 2021 with VillageMD as Walgreens cobbled together the below healthcare footprint to sell a healthcare transformation story, including diving into value-based care headfirst.

Execution, however, didn’t go as planned. As Hospitalogists reading this breakdown know, healthcare is hard. Primary care is hard. Value-based care is hard. This dynamic isn’t unique to Walgreens and VillageMD, either.

Unfortunately this assemblage of assets no longer seems to be industry leading.

Plain and simple, Walgreens was desperate and overpaid for what it got in a low-interest rate environment. In its 2024 full year earnings release Walgreens incurred an $8.6B net loss on $12.7B in goodwill impairment charges (meaning they overpaid for these companies and the current earnings/economics could not support the acquired valuation, more or less). VillageMD performance weighed down the healthcare story given acute pressures in Medicare Advantage and changes to risk adjustment, along with significant capital and timeline required to build out an appropriate risk-bearing primary care player.

Unfortunately, unlike CVS, Walgreens lacks some of the most important assets to execute on the strategy (at least so far) to make the flywheel…fly – the PBM and the health insurance plan (side note that CVS isn’t doing particularly well either but for its own reasons).

Despite its own struggles, CVS holds a believable narrative to tell investors. From Q3:

But I digress. This is Walgreens’ share performance since acquiring a majority stake in VillageMD for $5.2B in late 2021, then proceeding to attach Summit Health for $9B in late 2022. At its peak, Walgreens held a $100B+ market cap in 2015.

Today it sits at $8B:

In Walgreens, Sycamore is acquiring a struggling giant, but with a vast revenue base and operating footprint – $147.7B in revenue. While not being an accountant, the impairment charges are largely addressed in 2024, so Sycamore probably thinks there’s significant value to unlock over time as a private company – and tax savings to boot. I’m inclined to agree. Walgreens holds some bright spots. Without being under the gun of quarterly investors Walgreens will have more freedom to reduce its debt load and continue billions of dollars in cost-cutting initiatives (1,200+ store closures in the coming years, capex reductions, working capital reductions). Expect to see Walgreens continue this trajectory but also focus on growing service lines like specialty pharmacy – probably its best acquisition to date.

 

Filed under: General Problems