Walgreens' plan to cut VillageMD stake brings more questions

Walgreens' decision to sell its majority stake in VillageMD raises questions about how much interest there is in the struggling business model.

Walgreens CEO Tim Wentworth said last week the company will no longer be majority owner in primary care provider VillageMD, noting plans to "rapidly unlock liquidity" on last week's third-quarter earnings call. He did not provide further details.

Related: Walgreens to cut stake in primary care provider VillageMD

A Walgreens spokesperson did not answer questions on whether there are interested investors and how much stake the company wants to sell.

Financial analysts said there are a few possible investor options including companies that have already invested in VillageMD.

Cigna's Evernorth, which holds a minority stake, could be a logical choice to increase its ownership in VillageMD, analysts said. Cigna did not respond to a request for comment. The company wrote off $1.8 billion of its VillageMD investment in May.

Private equity firms will also likely show interest, as could other clinic operators, analysts said.

Keonhee Kim, equity analyst at investment firm Morningstar, said CVS Health could also consider purchasing a stake as a way to grow its footprint. CVS, which also owns insurer Aetna and pharmacy benefit manager CVS Caremark, has said it is still committed to primary care, even as other retailers back away from the model. The company bought Oak Street Health in a $10.6 billion deal just over a year ago and is moving forward with plans to add more clinics.

A CVS spokesperson declined to comment.

One big question is what a buyer could expect to gain by investing in a tough model like primary care. Walmart announced it was shutting down its Walmart Health unit on April 30, including the customer-facing virtual care platform and 51 clinics across five states. Also this spring, Dollar General ended a pilot program with DocGo for mobile health clinics in Tennessee.

"Valuations have really compressed in that space," said Brian Tanquilut, managing director of healthcare services equity research at investment banking firm Jefferies. "What is the monetization aspect of it? How much could they sell Village for is the big [question] in my mind."

Value-based primary care in particular is slow to turn a profit. Meanwhile, inflation is putting pressure on providers' expenses, and medical costs are rising due to higher-than-expected use, especially in Medicare Advantage. Contract disputes with payers also create challenges.

Elizabeth Anderson, managing director at investment banking advisory firm Evercore ISI, said there is a broader desire to make value-based primary care work better, but the industry hasn't figured out what works and what doesn't.

Walgreens doesn't have that kind of time, according to analysts.

"Walgreens isn't really in the business right now of waiting for profitability," said Stephanie Davis, managing director of healthcare technology and distribution at investment bank Barclays. "I do think there is still interest ... for these value-based assets. Profitability in [value-based care] contracts takes time to ramp, but it doesn’t necessarily mean that profitability is out of reach — it could just be a better fit for the private markets."

Walgreens invested $5.2 billion in 2021 to take a majority stake in VillageMD. The company rolled out hundreds of Village clinics attached to Walgreens drugstores, talking up the benefits of collaboration between physicians and pharmacists. Late last year, those plans took a negative turn, and VillageMD shuttered dozens of clinics as part of a $1 billion cost-cutting initiative at Walgreens.