Brewer hopes Walgreens’ various businesses will feed off each other, with doctors sending prescriptions to Walgreens pharmacies and home health patients ordering durable medical equipment like scooters and lift chairs. In addition to bolstering pharmacy and retail sales, the goal is to drive traffic to Walgreens’ new Health Corners, which include in-person and digital offerings like a caregiver app and support for those managing chronic conditions.
“The pandemic definitely gave WBA a chance to step up like never before and we've delivered in so many ways, but we're absolutely just getting started in terms of how we can mobilize to solve big complex problems,” Brewer said at an investor conference this month. “I believe we have some tremendous underlying momentum within this business and the pandemic has further proven the importance of pharmacies in local communities around the world.”
But Deerfield-based Walgreens’ new businesses are subject to the same forces squeezing profit margins at companies throughout the healthcare sector—including Walgreens’ pharmacy, which accounts for more than three-quarters of its U.S. sales.
Primary care providers like VillageMD face price pressures from government health plans and private insurers that are gaining more power as they consolidate. VillageMD will need high patient volumes to offset the margin squeeze.
“There are a lot of sectors in healthcare that have low profit margins but are very profitable because they can take advantage of large volumes,” says Dr. Joel Shalowitz, an adjunct professor at Northwestern University's Feinberg School of Medicine.
Patient volumes and hoped-for synergies will depend in part on health insurers, which influence what doctors their members see and where they buy their prescriptions. Insurers and industry middlemen called pharmacy benefit managers, or PBMs, often steer patients to a preferred pharmacy chain over others, potentially limiting Walgreens’ pool of potential customers.
Walgreens' archrival CVS Health owns Aetna, one of the largest health insurers, and CVS Caremark, one of the top PBMs. CVS is pursuing the same healthcare-focused strategy as Walgreens, with clinics in its stores and a slate of new health services.
Whether Aetna will cover visits to clinics owned by its top competitor is an open question. Similarly, CVS Caremark may incentivize customers to get their prescriptions from CVS.
Walgreens, for its part, has contracts with various insurers, and CFO James Kehoe touts its lack of an insurance company as an advantage.
“We don't have an insurance company directing what we're going to do locally,” Kehoe told investors. “Our only interest is consumer health and that's why we believe our approach is unique and differentiated in the market.”
Kehoe said healthcare investments, including additional acquisitions, will drive growth, predicting “high-teens” annual revenue increases in the Walgreens Health segment after 2024. The company expects adjusted EPS growth of 11% to 13% after 2024, he said.
That would be a dramatic turnaround after three straight years of declining adjusted EPS, including a 14.1% drop in fiscal 2021. Brewer is aiming for a growth rate closer to that of UnitedHealth Group, which owns the nation’s largest health insurer and a network of more than 50,000 doctors. Even CVS Health saw earnings per share grow an average of just 10.6% over the last 10 years, including a big boost in 2018 following its merger with health insurer Aetna.
“I doubt they can achieve that kind of growth,” says professor Erik Gordon of the University of Michigan’s Ross School of Business. “Walgreens isn’t the only company that does this.”
At the same time she's managing this transformation and stitching together health-focused investments, Brewer will be conducting a $1.3 billion cost-cutting campaign.
Adding pressure is the fact that Walgreens isn’t the only retail pharmacy betting big on healthcare. CVS Health is launching HealthHubs to offer an expanded range of healthcare services. And Walmart is rolling out health centers, in addition to a partnership with Oak Street Health, a Chicago-based network of primary care centers.
“All of these very large players are looking at vertical integration in a different way,” Shalowitz says, “but eventually may end up with the same components.”