Meanwhile, billionaire Stefano Pessina arose over as chief administrative director of Walgreens Boots Alliance Inc. in 2015; he quickly started to hunt for his next big opportunity. By October of that year, he’d organized it: a $9.4 billion program to buy Rite Aid Corp. that would have arched Walgreens past CVS Health Corp. to convert by far the most comprehensive U.S. pharmacy chain.
But later, he settled about two years addressing administration leaders and investors, and regulators barred Walgreens from taking Rite Aid. In September 2017, Pessina had to pay for buying 1,932 Rite Aid stores, less than half as many as his primary purpose.
As it clearly resembles, that might have saved Walgreens an even more severe charge than the one it now reaches. On Apr. 2 shares of the company dropped 13 percent after it said profits would be reliable for the rest of its business year, which ends on Aug. 31. Pessina, who owns 15.9 percent of Walgreens shares, lost $1.2 billion of his wealth in one day; the stock’s entire drop since his Britain-centered Alliance Boots drugstore chain mixed with the U.S.-based chain has abandoned up to 28 percent.
The Issues Arising
Walgreens’s problems indicate a power shift that’s reshaping the whole prescription-drug business, from the organizations that are investigating and assembling medicines to the insurance firms that pay for them. Washington’s complaint to decrease drug costs has reduced profit boundaries for physical drugstores such as Walgreens, CVS, and Rite Aid.
Big Pharma isn’t increasing the list prices of brand-name medications as fast as they once did, limiting growth in the already small cut drugstores can make from new blockbusters while drugstores have been unable to make up the shortfall with more significant increases on generic medications because those costs aren’t falling as quickly as in years past.
Then there’s Amazon.com Inc. The enormous online retailer has already made life uncomfortable for drugstores by selling beauty goods and over-the-counter cold medications at rock-bottom prices. Now, after buying online pharmacy PillPack for about $1 billion last June, Amazon may be poised to undercut its prescription business.
“It is the toughest environment I’ve ever seen” for pharmacies, says Goldman Sachs analyst Robert Jones, who cut Walgreens to a sell rating in December. “The core business is failing very fast.”
“It is the same drive you go, everywhere and characters don’t want to pay a bonus because it has Walgreens on the bottle or CVS on the bottle.”
New Locations And Drugstores
Perhaps most troubling, insurers are pitting drugstore chains against one another as they seek to lock in low medicine prices. In the past, if a health plan issued a more massive chain out of its network, it ventured to alienate members who may have some drugstores nearby. Now there’s no such hesitation. With around 60,000 drugstores crowding American street crossings, insurers can drop one of the two big chains without inconveniencing many customers.
There are 9,560 Walgreens shops in the U.S. competing with 9,800 CVS locations and 22,000 neighborhood drugstores. Then there are the drugstores tucked inside food stores and big-box discounters such as Walmart. Those players are often willing to offer more economical drug costs to get shoppers through the door.
These times, “nobody cares whether you have Walgreens in the system,” declares Michael Rea, a founder of Rx Savings Solutions, which has an app that helps sufferers find the best values. “It is the same drug wherever you go, and people don’t want to pay a premium because it has Walgreens on the bottle or CVS on the bottle.”
The insurers have frequently included “conventional networks” that force patients to pay more to roam beyond favored drugstores to pick up a prescription. In 2019, 92 percent of Medicare prescription plans used such networks, associated with 7 percent in 2011, according to the Drug Channels Institute.
Sixty-one percent of companies in 2018 limited medicine networks in some way, up from 36 percent in 2015, according to surveys by the Pharmacy Benefit Management Institute. A significant reason: Health plans generally save 3 percent to 7 percent of total drug costs by adopting a small network, according to a white paper by DST Pharmacy Solutions.
So Walgreens is stretching its area. It will try to shave more than $1.5 billion in year-long expenses within three years and close 750 of the Rite Aid stores it acquired. Walgreens failed to make Pessina or other administrators available to clarify for this article.
Some Walgreens opponents have accommodated by broadening their interests. CVS bought insurer Aetna for about $68 billion last year, in a deal announced on the idea that having health clinics and a drugstore under one roof would save customers time—and save money by keeping people away from the clinic. The association also owns the giant drug-benefit manager Caremark, which allows it to cut deals with companies and health plans that steer sufferers to its markets.