Walgreens' (WBA) stock is down more than 50% this year as the company continues to face retail headwinds and pivots to a brand new strategy for the pharmacy chain.
CEO Tim Wentworth, who has been on the job for eight months, laid out an aggressive plan to revamp the company on its third quarter earnings call Thursday.
The future Wentworth envisions is one in which pharmacies are local hubs for healthcare access.
The health ecosystem idealizes pharmacies — chains, independents, and online — as a way to maintain patient health. They have also been viewed as expert consultants in the case of minor healthcare needs ranging from advice on over-the-counter products to helping administer specialty drugs on site.
Wentworth wants to double down on that idea by investing in technology to help automate tasks for pharmacists in order to free them up for patients' needs.
"I am confident WBA will be a leader in the future of healthcare, with pharmacy and retail at its center," Wentworth said.
However, that strategy hasn't worked in the past.
The idea of your friendly neighborhood pharmacist clashes with the economics of running a pharmacy and how they get paid by pharmacy benefit managers.
It's the struggle pharmacies of all sizes face with ever-decreasing reimbursements from the three largest pharmacy benefit managers: CVS Caremark (CVS), UnitedHealth's Optum Rx (UNH), and Cigna's Express Scripts (CI), where Wentworth previously served as CEO.
Wentworth said he is fighting "to align incentives and ensure we are paid fairly."
Pharmacies have been fighting since before the pandemic. The impact of consumer trends on front-of-store sales (for beauty and food items), as well as the pressure of being paid fairly for prescriptions, has been the focus of earnings calls for years — and was a catalyst for both Walgreens' and CVS's healthcare services strategy.
COVID offered a brief reprieve for pharmacies, with increased revenues from vaccines, testing, and the need for over-the-counter medications.
That has since tapered off, forcing pharmacies to reduce business hours, close stores, and reconsider how to best utilize storefronts to serve evolving patient needs.
One area in which Walgreens is ahead of the competition is clinical trials.
The company has been converting walk-in clinic spaces into clinical trial spaces and successfully clinched a deal with Boehringer Ingelheim.
The US Food and Drug Administration (FDA) recently announced requirements for drug companies to diversify their clinical trial participant pool, for which Walgreens is now well poised.
But that didn't stop the sell-off Thursday on the news that the company would be struggling in the short term. It lead to the worst day for the company in nearly four decades, closing 22% lower Thursday.
Most analysts believe the company is employing a solid strategy, but it will require patience to execute, especially as a key source of revenue, PBMs, are increasingly becoming competition.
JPMorgan's Lisa Gill said in a note late Thursday that the process would take time.
"We continue to believe that in the longer-term, WBA has the potential for growth. If there is a silver lining to this print, we believe that the company is making the necessary steps to stabilize its footprint and working with PBMs and payors to manage reimbursement headwinds," she wrote.
Bank of America's Allen Lutz similarly noted, "It is imperative that Walgreens pushes back more assertively against PBMs to capture a more reasonable return on capital."
But, he added, "It is not fully clear if a more aggressive push by retail pharmacies would yield favorable results. However, the risk from continuing down the current path for WBA may prove worse."
Walgreens is the largest retail pharmacy chain, with nearly 10,000 locations. Competitor CVS has more than 9,000, and RiteAid — which is currently in bankruptcy even after Walgreens acquired nearly 2,000 locations — has less than 2,000.
