Walgreens Boots Alliance Inc WBA 0.55%, the newest member of the Dow Jones Industrial Average, is “poorly positioned” within the evolving retail pharmacy space, according to Cowen.
The Analyst
Charles Rhyee downgraded Walgreens Boots Alliance from Outperform to Market Perform with a price target lowered from $77 to $71.
The Thesis
The retail pharmacy space is in the early stages of transforming from a “fee-for-service” model towards “value-based care,” which implies care coordination will become more important in the future, Rhyee said in a note. Walgreens’ failure to fully embrace industry shifts to remain a traditional retail pharmacy would leave it more exposed to disruption.
Instead, Rhyee said CVS Health Corp CVS 1.65%‘s proposed merger with Aetna Inc AET 0.41% is a prime example of a pharmacy retailer integrating care coordination in its business through the direct ownership of Aetna. This model should generate margin improvements and market share gains for CVS at the expense of Walgreens who will be reliant on generating volume at the retail level to spur growth.
It should be noted Walgreens is showing some operational problems that may be overshadowed by earnings beats, the analyst said. Since the first quarter of 2016, the company has met consensus FIFO gross margin expectations just four times and adjusted operating income expectations only six times. The multiple misses on these metrics may signal the challenging macro environment due to continuing reimbursement pressures.
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