Despite plans to close 60 clinics this year, Walgreens is still convinced primary care provider VillageMD will become a major growth engine.
VillageMD, which operates primary care clinics under the Village Medical name, is on a path to profitability and a "fabulous sandbox" for building and testing the company's healthcare services strategy, CEO Tim Wentworth said Thursday.
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That strategy has stumbled in recent quarters, failing to produce promised returns after billions of dollars in investments. Former CEO Roz Brewer's abrupt exit in September raised concerns about the strategy she championed. In releasing its fiscal first-quarter results Thursday, Walgreens said its healthcare segment recorded a $436 million operating loss, flat with a year ago.
"I came to WBA, eyes wide open, with a clear mandate to act with everything on the table in terms of putting our business on the right track," Wentworth said on an earnings call with analysts.
Company executives expect the healthcare segment to contribute to adjusted earnings in the second half of its fiscal 2024.
Here are five areas of focus for Walgreens.
1. VillageMD remains key to its growth
Executives have high hopes for VillageMD, despite the recent slowdown in clinic expansion.
The company is in the process of closing 60 VillageMD clinics and exiting five lower-performing markets over the next year. It has already moved to shut down 27 of those clinics, Wentworth said. VillageMD is shuttering 10 clinics in Jacksonville, Florida, as of Friday. It also plans to close all 12 of its Indiana clinics effective Jan. 19. A Walgreens spokesperson said the company is not disclosing where the other five are located.
VillageMD, in which Walgreens invested $5.2 billion to take a majority stake in 2021, generated about $1.4 billion in first-quarter sales, a 14% pro-forma increase from a year ago. VillageMD's $8.9 billion acquisition of Summit Health-CityMD in January 2023 also is boosting sales results.
2. Walgreens won't buy more practices
The company is one and done when it comes to the VillageMD investment and unlikely to invest in other primary care operations, Wentworth said. Investors can expect more partnerships like the one that launched Jan. 1 with Pearl Health, a primary care enablement technology company that helps clinicians transition to value-based reimbursement.
"The lens that we're going to put on these things is, do they create sustained value for payers, patients, health systems, PBMs, and if they do, can we get a fair return on the capital we're going to invest in them? If the answer is we can't get a fair return, we're not a charity, so we won't do it," Wentworth said.
3. Walgreens is not interested in purchasing a PBM
Walgreens is not looking to emulate CVS/Caremark. Wentworth said the company is more interested in partnering with various PBMs, rather than buying a smaller one.
By remaining independent, Walgreens is in a good position to create more value for PBMs and payers with pay-for-performance plans, he said.
4. Walgreens is all-in on cost cuts
Walgreens is on track to achieve $1 billion in cost savings this year, as part of a plan it announced last fall. The company reduced its headquarters workforce by 20% and cut its first-quarter capital spending by more than $100 million from the year-ago period. Its goal is to reduce capital spending by $600 million this year.
Walgreens on Thursday cut its quarterly dividend by 48%, to 25 cents per share, starting in March. It plans to invest the savings into growing the pharmacy and healthcare services businesses and paying down debt, Wentworth said.
5. Medicaid redeterminations are hurting pharmacies
Wentworth said Medicaid redeterminations, in addition to a weaker flu season, hurt Walgreens' pharmacy business in the first quarter.
Redeterminations are creating a ripple effect for providers as millions of people lose coverage nationwide, often due to administrative issues. The changes lead to less demand for healthcare services, including for medications that are no longer covered.
Still, Walgreens' pharmacy business was in line with market trends, reporting a 10.7% sales increase from a year ago.
