WBA - Walgreens Boots Alliance

[Jurgis]

the need to have a prescription already makes it a high-friction transaction.  i don't have much experience with human prescription purchases, but do have some with vet prescriptions.  easiest is buy at the vet, second easiest is to grab the slip of paper and carry it somewhere local to complete the purchase.  most difficult is to fill out info and/or get the vet to fax or email the scrip to wherever you want to make the online purchase.

 

do doctors/hospitals have any incentive to streamline that process for amazon?

 

Good question.

 

I think my doc just transfers prescription to preferred pharma that's somehow on my docs with him. Which is some CVS branch near my place. I don't really know how to change that - I assume I'd have to talk to my docs assistant. I don't know how they send it there either - fax? call? some online form??

 

But, as I said, I don't use meds often, so I don't delve into that process much.

 

Which might be another +1 for local CVS: infrequent med purchasers just don't bother to setup online accounts/etc or change the default to them.

[mwtorock]

maybe to expand on the point about urgency - a lot of groceries have pharmacy service too, but CVS/WBA keep getting market shares. Walmart/Costco both have cheaper drugs prices than CVS/WBA, but they do not have drive through or convenient locations. When you have a sick kid in the car, CVS or WBA is pretty much only choice.

 

Both CVS and WBA are trying to use their retail location for something else, like blood tests, or clinics. Don't know how that will work out, but the market always changes and these guys always adopt to the changes.

[mrholty]

the need to have a prescription already makes it a high-friction transaction.  i don't have much experience with human prescription purchases, but do have some with vet prescriptions.  easiest is buy at the vet, second easiest is to grab the slip of paper and carry it somewhere local to complete the purchase.  most difficult is to fill out info and/or get the vet to fax or email the scrip to wherever you want to make the online purchase.

 

do doctors/hospitals have any incentive to streamline that process for amazon?

 

Good question.

 

I think my doc just transfers prescription to preferred pharma that's somehow on my docs with him. Which is some CVS branch near my place. I don't really know how to change that - I assume I'd have to talk to my docs assistant. I don't know how they send it there either - fax? call? some online form??

 

But, as I said, I don't use meds often, so I don't delve into that process much.

 

Which might be another +1 for local CVS: infrequent med purchasers just don't bother to setup online accounts/etc or change the default to them.

 

I have 3 young kids and my doctors office is 30 minutes from my house.  We regularly have scripts called in.  Doctor notes the record in computer and then either the nurse or the doctor asks where I want the script sent.  For local its no problem and takes 30 seconds. 

 

For my family using Amazon or any mail delivery would need to be sustantially cheaper to make me want to switch.  And somebody above stated that they didn't think that pharmacists in the US talk to the patient. I don't find that at all.  My normal questions that I get are:

1.  Have you used this before?

2.  Do you have questions/Concerns that you want to the talk to the pharmacist about?

 

My mom uses mail by order drugs from Canada but she is saving about $200/month.

The local pharmacy (non-chain) by me only stays in business as they do all the drugs for the local nursing homes and assisted living centers and put together day kits for each patient.  Walgreens and CVS will play in that space via a remote office but not local which is why the local pharmacy still limps along.  At the end of the day if I run an Assisted Living location where i am paying CNAs $11/hour I want the pack of daily pills for each patient to be right 99.9999% of the time as I don't trust my patient.  Based on how often I see Amazon screw up orders I wouldn't switch and I doubt they can save much vs the incumbents.

[Cigarbutt]

Many valid points raised and it is reasonable to expect drug expenditures per capita to continue to grow more than the number of pharmacies per capita, with measured impacts from alternative models and reasonable to expect that WBA will perform relatively better than the market.

 

Some describe the urgency (need it now argument) but most of drug expenditures result from chronic conditions (from Express Scripts numbers: diabetes (#1), high cholesterol, high blood pressure, attention disorders, arthritis, pain, multiple sclerosis, HIV etc) with prescriptions simply renewed between appointments, relatively reducing the need to go to a physical location in order to get the medications.

 

Also, contrary to other segments, in terms of who is paying and from where incentives may come to alter/adapt, patient out-of-pocket expenses are down.

 

Distribution of total national health expenditures on retail prescription drugs, by payer, 2005 and 2016 (From Kaiser data)

 

                                  2005 (%)                  2016 (%)

Private insurance            50                            43

Medicare                          2                            29

Medicaid                        18                            10

Out-of-pocket                  25                            14

Other                              5                              4

 

Compliance or adherence is a huge problem and part of the appeal of the "technology" entrants is related to packaging. With aging demographics, established pharmacies' capacity to adapt and an evolving and more focused on cost payer profile, more efficient packaging practices may become instrumental.

 

Example:

https://www.readymedspharmacy.com/packaging.php

[DooDiligence]

I know, Wikipedia, but...

 

https://en.wikipedia.org/wiki/MinuteClinic

 

"MinuteClinics are now providing primary care, as well as management of some chronic diseases such as diabetes, pulmonary diseases, and hypertension in many states. The expansion of primary care services is in conjunction with the growing need for primary care providers across the country."

 

---

 

Convenient.

Frictionless?

 

I don't have a primary care doctor & it's a pain in the @55 finding a new one.

 

I've got a sty on my eye that won't go away & there's a Minute Clinic not too far from me.

 

I'm going there tomorrow morning.

 

We'll see  :o

[Cigarbutt]

I don't have a primary care doctor & it's a pain in the @55 finding a new one.

 

I've got a sty on my eye that won't go away & there's a Minute Clinic not too far from me.

 

I'm going there tomorrow morning.

 

We'll see  :o

 

DooDiligence,

When a kid, I had some kind of focal deficiency in immunity (related to the bacteria that causes stye formation (chalazion), which completely resolved over time) giving rise to recurrent infections (boils, complicated varicella) including repeated bouts of styes. Warm compresses used to do the trick. Obviously, this is not advice and it is a good idea to have it checked but please provide feedback on your experience.

[Eigenvaluator]

Take a look at this WBA pitch from the 2018 MOI Global Best Ideas:

 

http://www.rgaia.com/walgreens-boots-alliance-owner-operator-run-pharmacy-retail-leader/

[Spekulatius]

the need to have a prescription already makes it a high-friction transaction.  i don't have much experience with human prescription purchases, but do have some with vet prescriptions.  easiest is buy at the vet, second easiest is to grab the slip of paper and carry it somewhere local to complete the purchase.  most difficult is to fill out info and/or get the vet to fax or email the scrip to wherever you want to make the online purchase.

 

do doctors/hospitals have any incentive to streamline that process for amazon?

 

Good question.

 

I think my doc just transfers prescription to preferred pharma that's somehow on my docs with him. Which is some CVS branch near my place. I don't really know how to change that - I assume I'd have to talk to my docs assistant. I don't know how they send it there either - fax? call? some online form??

 

But, as I said, I don't use meds often, so I don't delve into that process much.

 

Which might be another +1 for local CVS: infrequent med purchasers just don't bother to setup online accounts/etc or change the default to them.

 

Same for me. Setting up a new account just for the occasional prescription is just not worth the hassle. FWIW, my best experience with respect to pharmacy was when I was with the Kaiser HMO, where the pharmacy is fully integrated. The doc makes a prescription, there is no paperwork and you just pick up the stuff in the same building 5 min later, swiping your membership card. That’s why I think the prescription service should be integrated with the insurance company.

 

The main thing that AMZN May be able to do is make the whole process simple and quick. I don’t really think that price is the main issue.

[DooDiligence]

I don't have a primary care doctor & it's a pain in the @55 finding a new one.

 

I've got a sty on my eye that won't go away & there's a Minute Clinic not too far from me.

 

I'm going there tomorrow morning.

 

We'll see  :o

 

DooDiligence,

When a kid, I had some kind of focal deficiency in immunity (related to the bacteria that causes stye formation (chalazion), which completely resolved over time) giving rise to recurrent infections (boils, complicated varicella) including repeated bouts of styes. Warm compresses used to do the trick. Obviously, this is not advice and it is a good idea to have it checked but please provide feedback on your experience.

 

Thanks, and I will post updates for those interested in how CVS primary care performs.

 

I visited a Baptist Hospital Urgent Care Clinic over a month ago & they prescribed Bacitracin which I've used as needed along with the hot compress thing.

 

I revisited the same clinic because the sty was not going away & I asked the intake chick if she would get me a referral without having to pay another $33 & she said no, the doctor needs to look at me again.

 

The doctor did nothing but advise more of the same with the promise of a referral which never came.

 

I really hope CVS provides better service than Baptist (for my own health & for the little bit of CVS I own.)

 

I've got another recent & better story about Baptist but I'll save it.

[mwtorock]

Take a look at this WBA pitch from the 2018 MOI Global Best Ideas:

 

http://www.rgaia.com/walgreens-boots-alliance-owner-operator-run-pharmacy-retail-leader/

 

nice write up. i have pretty much all the key points in my notes, but would never be able to present it so nicely.

[mwtorock]

The Amazon dip will be probably gone by tomorrow...

[petec]

I'm buying this today. Thesis:

- 10x FCF for a business that is taking share in a fragmented, growing industry.

- Brilliant and committed founder-CEO is buying shares at the current price using cash.

- Amazon a concern but business has had to adapt to threats over the years and can again.

- Vision to transform stores into local non-critical healthcare providers - hard for Amazon to compete.

- Interaction with pharmacists - hard for Amazon to compete.

- Fact that most buyers of chronic meds are older - not the obvious Amazon demographic.

- Amongst younger buyers (Amazon demographic) most meds (especially for kids) have a sense of urgency - next day doesn't work.

- Scripts is low margin. Incremental scripts is high margin but overall it's low. My margin is your opportunity doesn't work here.

- EDIT: the failure of mail order to really damage this business says something (although I am not sure exactly what) about Amazon's chances.

- Vision to move front end to focus on high-margin beauty products - worked well in UK. I accept that doesn't necessarily mean it will work in the US, but...

- ...data from the Balance card is a new advantage and gives me confidence they won't do something without evidence it will work. Boots Advantage card is a huge advantage in the UK.

 

I agree with the comment above that if Amazon wins it won't be via price but simplicity. It's not impossible to imagine a scenario whereby your doc gives you a prescription which is wired automatically to Amazon, who arrange drone delivery by the time you get home. That would be huge and is something to watch. But reading the analyst day transcript I get the distinct sense that the coming WBA store transformation is something they are very confident in, and Pessina continuing to buy shares strengthens my conviction in that.

 

Incidentally I am struck by the fact that gross profits have been growing fairly steadily despite 500bps of gross margin compression over the last 5 years. I suspect sales aren't the thing to focus on here, especially in front of store where they say they are cutting a lot of sales that weren't profitable. Gross profit dipped in 2017 but is growing again in 2018 and I don't think that's just down to the addition of Rite Aid because it started before the deal closed. Anyway, I will be watching gross profit more closely than sales.

 

 

[Spekulatius]

Take a look at this WBA pitch from the 2018 MOI Global Best Ideas:

 

http://www.rgaia.com/walgreens-boots-alliance-owner-operator-run-pharmacy-retail-leader/

 

nice write up. i have pretty much all the key points in my notes, but would never be able to present it so nicely.

 

Pretty compelling.  I put this one in my watchlist in case there is a correction.

[kab60]

I'm buying this today. Thesis:

- 10x FCF for a business that is taking share in a fragmented, growing industry.

- Brilliant and committed founder-CEO is buying shares at the current price using cash.

- Amazon a concern but business has had to adapt to threats over the years and can again.

- Vision to transform stores into local non-critical healthcare providers - hard for Amazon to compete.

- Interaction with pharmacists - hard for Amazon to compete.

- Fact that most buyers of chronic meds are older - not the obvious Amazon demographic.

- Amongst younger buyers (Amazon demographic) most meds (especially for kids) have a sense of urgency - next day doesn't work.

- Scripts is low margin. Incremental scripts is high margin but overall it's low. My margin is your opportunity doesn't work here.

- Vision to move front end to focus on high-margin beauty products - worked well in UK. I accept that doesn't necessarily mean it will work in the US, but...

- ...data from the Balance card is a new advantage and gives me confidence they won't do something without evidence it will work. Boots Advantage card is a huge advantage in the UK.

 

I agree with the comment above that if Amazon wins it won't be via price but simplicity. It's not impossible to imagine a scenario whereby your doc gives you a prescription which is wired automatically to Amazon, who arrange drone delivery by the time you get home. That would be huge and is something to watch. But reading the analyst day transcript I get the distinct sense that the coming WBA store transformation is something they are very confident in, and Pessina continuing to buy shares strengthens my conviction in that.

 

Incidentally I am struck by the fact that gross profits have been growing fairly steadily despite 500bps of gross margin compression over the last 5 years. I suspect sales aren't the thing to focus on here, especially in front of store where they say they are cutting a lot of sales that weren't profitable. Gross profit dipped in 2017 but is growing again in 2018 and I don't think that's just down to the addition of Rite Aid because it started before the deal closed. Anyway, I will be watching gross profit more closely than sales.

Simple and to the point. I like that. I'd also add the fact, that you have a recession resistent business model, low debt and a 10b $ buyback. We'll see if it's Amazon resistent, but I like the odds though I already have a large retail exposure in Ads and Azo, so no position (yet).

[petec]

I'd also add the fact, that you have a recession resistent business model, low debt and a 10b $ buyback.

 

Agreed on the recession and the debt. Key factors. Being pedantic, I don't care much about the buyback - that's captured in the FCF multiple for me - whether they spend it on buyback, M&A, or dividend is up to Pessina. He's proven pretty good at those decisions over the years! The point is they are flowing cash like crazy and have options to add value with it.

[kab60]

Made this a 10 pct position. Had a very succesful investment in Autozone when it was hit by the Amazon scare. Autozone is a better business, but at a close to 10 pct. FCF yield I like my odds here. Plus, while the American health system is stupid, even in countries with better working systems there's a need for pharmacies. Petec has already put the case better than I can, but generally I like these stalwarts in somewhat predicable industries with solid ROIC, a long history and good management with high ownership stakes. Even without multiple expansion, returns should be decent. If the narrative shifts sometime, and people recognize Amazon are having a tough time trying to be everything at once, returns could be great.

[Spekulatius]

Made this a 10 pct position. Had a very succesful investment in Autozone when it was hit by the Amazon scare. Autozone is a better business, but at a close to 10 pct. FCF yield I like my odds here. Plus, while the American health system is stupid, even in countries with better working systems there's a need for pharmacies. Petec has already put the case better than I can, but generally I like these stalwarts in somewhat predicable industries with solid ROIC, a long history and good management with high ownership stakes. Even without multiple expansion, returns should be decent. If the narrative shifts sometime, and people recognize Amazon are having a tough time trying to be everything at once, returns could be great.

 

Same thoughts here, this has just become too cheap, unless we are missing an elephant in the room. The healthcare sector traditionally has pretty stable fundamentals, but it’s market perception can cause wide swings. I read the last investor conference transcript and I liked their no nonsense approach. I found it interesting that they had headwinds from Aetna shifting to prescriptions to CVS and how the pharma value chain changes lead to a more fee for service business model and the PBM might get disintermediated. I am adding on weakness.

[gjangal]

it is relatively cheap. it almost looks like a walmart kind of situation 2 years ago when you could buy wmt for 60 bucks. Front of the store will continue to bleed revenue to the dollar stores and amazon

[Viking]

Wow. WBA and CVS are getting taken out behind the wood shed. Bought a little WBA today. My concern with CVS is how much they paid for Aetna (likely overpaid) and how much debt they are carrying. Both of these companies are trading at about same price as 5 years ago.

 

Time to do a deep dive on this sector.

[Spekulatius]

Wow. WBA and CVS are getting taken out behind the wood shed. Bought a little WBA today. My concern with CVS is how much they paid for Aetna (likely overpaid) and how much debt they are carrying. Both of these companies are trading at about same price as 5 years ago.

 

Time to do a deep dive on this sector.

 

Agreed. It’s either a mindless selloff or everyone knows there is bad news and runs to the exit. WBA is cheaper now than it was in 2009. Also note that the whole sector is selling off - the distributors MCK (I bought some today), ABC, and CAH, dialysis provider DVA, CVS of course...

[dwy000]

I think the selloff today was because the FDA commissioner resigned.  Could have been due to or have implications on the push to reduce drug prices (which is itself a bit of a false headline).

[Spekulatius]

I think the selloff today was because the FDA commissioner resigned.  Could have been due to or have implications on the push to reduce drug prices (which is itself a bit of a false headline).

 

The FDA commissioner doesn’t set drug prices though. Also, if drug prices were the main concern, the Pharma stocks should be hit much harder, but that’s not the case. I can’t explain the selloff, at least not the extend at which is happening, but I couldn’t explain how GS got to $150/share either. It is disturbing is that we haven’t really seen a broad market selloff yet.

[Viking]

Good read from 2016; reviews the Alliance Boots transaction and the following internal changes: http://fortune.com/walgreens-greg-wasson-stefano-pessina/

[Spekulatius]

Thanks for posting. I wasn’t aware of the the man’s (Pessina) history driving the results, but it seems like a good guy betting on. it should be noted that they just acquired part of Rite Aid this year for $4.4B and cheaper than the original plan (even adjusted for the original scope). It is also clear that they are slowly following the Boots script and emphasize beauty over the convenience store nature of Walgreens stores.

[Okonomen]

Any thoughts on the CEO with 15% stake approaching 80 years of age? Just seeing this as kind of a black box, i.e. he's been a great visionary, but going forward there could be some worries about his successor (and a potential change in strategy for the biz and capital allocation) and his stake

 

I like the stable characteristics about this business, generating whole lotta cash, conservative debt level, trading around 10% FCF yield, being a dividend aristocrat while buying back lots of shares etc. however, everybody can see this. It's no secret. I just see AMZN and others being able to eat a chunk of the market. It's not like AutoZone where you clearly saw that the fear was overstated in 2017 (still long AZO after the big AMZN selloff). In this case lots of the products are actually not that protected vs online (AMZN and others), and if you go to the US there really is a pharmacy or two on each and every street even in smaller cities. It seems really saturated