WBA - Walgreens Boots Alliance

[Cigarbutt]

PBM's are middlemen and their profits are tiny compared to total drug spend.  If total drug spend is flat but consumers aren't reaping the benefits the question might be what payers are doing with the rebates.

I agree, PBM's have taken the heat over this but the fact is that their clients (self insured employers, for example) are the one's who decide whether or not to pass the rebate on to their employees.

The argument with respect to the PBM is that they are working with the drug manufacturers to increase the list prices, while at the same time increasing the discounts to the customer (from which they get a cut or at least it makes it appear that they do something) so the cost to the customer rises less. Just look at the drug channel link up thread  - drug list price increase by 6% and prices to consumers by 1.5% - how can this be?

 

I think the whole system lives of opaqueness- everybody pays a different price for the same product.

A related issue is that the PBMs will tend to choose more expensive drugs because of the higher associated margins and not because those drugs offer better value. In a way, the drug manufacturers are paying what looks like a kick-back in order to buy shelf space in the formulary devised by the PBMs. Incentives are simply not aligned for a good outcome.

 

Recently, attention has been given to the rebates and PBMs have slowly evolved to other fee schemes, including spread pricing, which is well researched and explained in the following, giving credence to the thesis that WBA's margins are affected by the PBMs' efforts to extract value along the distribution chain.

https://www.bloomberg.com/graphics/2018-drug-spread-pricing/

 

[DooDiligence]

PBM's are middlemen and their profits are tiny compared to total drug spend.  If total drug spend is flat but consumers aren't reaping the benefits the question might be what payers are doing with the rebates.

I agree, PBM's have taken the heat over this but the fact is that their clients (self insured employers, for example) are the one's who decide whether or not to pass the rebate on to their employees.

The argument with respect to the PBM is that they are working with the drug manufacturers to increase the list prices, while at the same time increasing the discounts to the customer (from which they get a cut or at least it makes it appear that they do something) so the cost to the customer rises less. Just look at the drug channel link up thread  - drug list price increase by 6% and prices to consumers by 1.5% - how can this be?

 

I think the whole system lives of opaqueness- everybody pays a different price for the same product.

A related issue is that the PBMs will tend to choose more expensive drugs because of the higher associated margins and not because those drugs offer better value. In a way, the drug manufacturers are paying what looks like a kick-back in order to buy shelf space in the formulary devised by the PBMs. Incentives are simply not aligned for a good outcome.

 

Recently, attention has been given to the rebates and PBMs have slowly evolved to other fee schemes, including spread pricing, which is well researched and explained in the following, giving credence to the thesis that WBA's margins are affected by the PBMs' efforts to extract value along the distribution chain.

https://www.bloomberg.com/graphics/2018-drug-spread-pricing/

 

When I look at CVS gross margins I see them declining since the Caremark purchase (21% to 16%).

Who did this margin go to? (patients, clients / payers?)

 

I made a cursory attempt to discover the main cause of the decline, which may not be from PBM or pharmacy ops, but I'm too swamped with school work to make a concerted effort.

 

These guys have all been put on notice by payers, legislators & more importantly, potential disruptors.

 

Personally, I believe that they'll do their best to deliver value to supply chain participants (patients & payers) where they can going forward.

 

Delivering value to shareholders may get put on the back burner out of necessity.

 

But, since they're now a payer as well?

 

---

 

You're making me think,

and for that I say thanks.

 

Math chick makes me think too,

but to her I say go away.

[Cigarbutt]

When I look at CVS gross margins I see them declining since the Caremark purchase (21% to 16%).

Who did this margin go to? (patients, clients / payers?)

 

I made a cursory attempt to discover the main cause of the decline, which may not be from PBM or pharmacy ops, but I'm too swamped with school work to make a concerted effort.

 

These guys have all been put on notice by payers, legislators & more importantly, potential disruptors.

 

Personally, I believe that they'll do their best to deliver value to supply chain participants (patients & payers) where they can going forward.

 

Delivering value to shareholders may get put on the back burner out of necessity.

 

But, since they're now a payer as well?

 

---

 

You're making me think,

and for that I say thanks.

 

Math chick makes me think too,

but to her I say go away.

Both WBA and CVS do business in a very competitive environment and the retail (brick and mortar) component is under attack. So pressures on margins are expected. Also, lately, retail pharmacy clinics have suffered from generic price inflation (versus lagging reimbursements), a reversal from a previous trend.

 

An aspect to consider is that, even if PBMs' gross "service" margins tend to be low (much lower than retail pharmacy), the bottom-line or cash conversion is much higher because it is an asset-light business and it bears very little operational and financial risk (apart from regulatory risk). This return on capital "adjustment" may explain the dip in margin levels that happened at CVS after the 2006 Caremark acquisition.

 

Continue your concerted efforts. 

 

[DooDiligence]

When I look at CVS gross margins I see them declining since the Caremark purchase (21% to 16%).

Who did this margin go to? (patients, clients / payers?)

 

I made a cursory attempt to discover the main cause of the decline, which may not be from PBM or pharmacy ops, but I'm too swamped with school work to make a concerted effort.

 

These guys have all been put on notice by payers, legislators & more importantly, potential disruptors.

 

Personally, I believe that they'll do their best to deliver value to supply chain participants (patients & payers) where they can going forward.

 

Delivering value to shareholders may get put on the back burner out of necessity.

 

But, since they're now a payer as well?

 

---

 

You're making me think,

and for that I say thanks.

 

Math chick makes me think too,

but to her I say go away.

Both WBA and CVS do business in a very competitive environment and the retail (brick and mortar) component is under attack. So pressures on margins are expected. Also, lately, retail pharmacy clinics have suffered from generic price inflation (versus lagging reimbursements), a reversal from a previous trend.

 

An aspect to consider is that, even if PBMs' gross "service" margins tend to be low (much lower than retail pharmacy), the bottom-line or cash conversion is much higher because it is an asset-light business and it bears very little operational and financial risk (apart from regulatory risk). This return on capital "adjustment" may explain the dip in margin levels that happened at CVS after the 2006 Caremark acquisition.

 

Continue your concerted efforts.

 

Thanks  :)

[JRM]

Some scuttle butt for whatever its worth:

 

My wife belongs to several pharmacists groups on facebook.  One consists of mostly Walgreens pharmacists who complain about their jobs.  The general consensus is that Walgreens is cutting back hours and offering new graduates less than they used to ($80k instead of $100k) starting out.  I think happy employees are important, but I don't think Walgreens has been in the business of keeping its pharmacists happy for a long time.  Here's what this tells me.

 

1.  There is an oversupply of pharmacists graduating (especially larger cities)

2.  It looks like Walgreens can cut one of its largest expenses significantly due to #1

 

This supply-demand dynamic will likely last 3-5 more years (my guess), as its already been going no for several years.  I'm interested to see how this trend plays out and if it helps EPS for both Walgreens and CVS.

[Cigarbutt]

Some scuttle butt for whatever its worth:

 

My wife belongs to several pharmacists groups on facebook.  One consists of mostly Walgreens pharmacists who complain about their jobs.  The general consensus is that Walgreens is cutting back hours and offering new graduates less than they used to ($80k instead of $100k) starting out.  I think happy employees are important, but I don't think Walgreens has been in the business of keeping its pharmacists happy for a long time.  Here's what this tells me.

 

1.  There is an oversupply of pharmacists graduating (especially larger cities)

2.  It looks like Walgreens can cut one of its largest expenses significantly due to #1

 

This supply-demand dynamic will likely last 3-5 more years (my guess), as its already been going no for several years.  I'm interested to see how this trend plays out and if it helps EPS for both Walgreens and CVS.

Good observation.

About twenty years ago, consensus view was that there would be a shortage due to growing demand.

These supply and demand cycles are typically long and recognized too late.

It seems that there is a significant potential for oversupply:

https://www.ajpe.org/doi/pdf/10.5688/ajpe7051

Pharmacists and pharmacy technicians are a large cost component to margins in a maturing and consolidating segment.

There is an argument that pharmacists may contribute more value in the coming transition but what has happened in retail pharmacies (including WBA) is that the employment growth of relatively low-cost pharmacy technicians has outpaced the employment growth of pharmacists.

[Jurgis]

Can someone explain to me what the ($100K) pharmacists do?

 

I understand their role in Europe where pharmacists can suggest/prescribe the medicine (although I somewhat doubt their qualifications and on the spot diagnosis). But in US what is exactly their job? If doctor prescribes the meds, their dispensing should be simple or even automated, no?

[JRM]

Most people think they just count pills, but they have technicians and robots to do that.  The position requires similar training to a doctor, 6-8 years of school with a residency typically.  They have knowledge of drug effects on the body as well as interactions with other drugs.  They provide a second check on the doctor (which is surprisingly necessary) and help to ensure abuses aren't taking place.  Their license rides on the fact that they are ensuring the correct drug in the correct dosage is dispensed every time.  The stakes are high with controlled substances.  Is the position worth $100k per year starting out?  I know pharmacists who make over $150 per year, and that's in the midwest.  I also know the curriculum is very difficult.  AI could probably do 70-80% of the job, though.

[Cigarbutt]

@JRM, Is that a detached view?

Opinion: pharmacists are worth their pay but a lot of what they provide may be at risk with more technicians, automation and AI and their potential value-add will evolve with the changing landscape (opportunity).

 

Community pharmacists spend on average about 2/3 of their time "dispensing" medications which involves more than just counting pills. They are also involved (more and more) as a "provider" (with the medication therapy management, as part of the newer legislations) of care and as potential prescribers.

 

Here's, for reference, WBA and CVS perspectives and another relevant document (see: Scope of Practice for Pharmacists):

https://www.walgreens.com/images/WH/Walgreens_Emerging_Role_Pharmacist_White_Paper.pdf

https://cvshealth.com/thought-leadership/the-role-of--pharmacists-in-a-changing-health-care-environment

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5008427/

 

Personal note: my father-in-law has had significant health issues lately and I have been impressed by the community pharmacist's role: side effects follow-up, personalized adjustments of medications with blood tests and even some coordination of care.

[JRM]

My wife is a pharmacist and I am in no way trying to down play how difficult her training/job is.  They add significantly more value than what most people realize.  Most of us probably just go to pick up a z-pack and wonder what the pharmacist is doing.

 

I know at large retail chains like Walgreens the pharmacist may be asked to dispense the drugs, run the cash register, and even administer flu shots. There is a lot of risk involved is the in dispensing controlled substances and the pharmacist is the gate keeper.

[DooDiligence]

Seems like these businesses would be moatworthy as long as the human touch is still effective & regulated.

[JRM]

Anybody looking at this one here?  I did some research a while back and took a pass.  Looks like a possible good setup at these prices.

[kab60]

There's a ton of great retailers on sale (more so a couple of days ago). I really wouldn't pick this lemon (something something about turning around a retailer). Neither would PE recently despite a ton of dry powder.

[JRM]

Do they need a turnaround?  It seems like they just tripped and fell into a pile of cash with covid-19. 

[kab60]

Last I checked they were going through a big restructuring with billions of "savings" I'm sure investors will never see on the bottom line. PE has money burning in their pockets and walked - don't understand why a pandemic changes anything fundamentally.

[JRM]

Last I checked they were going through a big restructuring with billions of "savings" I'm sure investors will never see on the bottom line. PE has money burning in their pockets and walked - don't understand why a pandemic changes anything fundamentally.

 

Maybe not enough to move the needle, but pharmcists have been given the ability to order and adminster COVID-19 tests.

 

https://www.hhs.gov/sites/default/files/authorizing-licensed-pharmacists-to-order-and-administer-covid-19-tests.pdf

 

Seems like a good way for Walgreens and CVS to drive some business.  Walgreens seems very well set up to be a retailer that thrives during the current situation.  They already have many drive through locations and mail order available.

[bizaro86]

Last I checked they were going through a big restructuring with billions of "savings" I'm sure investors will never see on the bottom line. PE has money burning in their pockets and walked - don't understand why a pandemic changes anything fundamentally.

 

Maybe not enough to move the needle, but pharmcists have been given the ability to order and adminster COVID-19 tests.

 

https://www.hhs.gov/sites/default/files/authorizing-licensed-pharmacists-to-order-and-administer-covid-19-tests.pdf

 

Seems like a good way for Walgreens and CVS to drive some business.  Walgreens seems very well set up to be a retailer that thrives during the current situation.  They already have many drive through locations and mail order available.

 

We've been buying more stuff (front of store) from our local pharmacy lately. It has a wide assortment, and is smaller and not busy, so seems safer.

 

If they start offering covid tests there I'll stop going completely.

[Jurgis]

Last I checked they were going through a big restructuring with billions of "savings" I'm sure investors will never see on the bottom line. PE has money burning in their pockets and walked - don't understand why a pandemic changes anything fundamentally.

 

Maybe not enough to move the needle, but pharmcists have been given the ability to order and adminster COVID-19 tests.

 

https://www.hhs.gov/sites/default/files/authorizing-licensed-pharmacists-to-order-and-administer-covid-19-tests.pdf

 

Seems like a good way for Walgreens and CVS to drive some business.  Walgreens seems very well set up to be a retailer that thrives during the current situation.  They already have many drive through locations and mail order available.

 

We've been buying more stuff (front of store) from our local pharmacy lately. It has a wide assortment, and is smaller and not busy, so seems safer.

 

If they start offering covid tests there I'll stop going completely.

 

What if they offer drive-through tests?

[bizaro86]

Last I checked they were going through a big restructuring with billions of "savings" I'm sure investors will never see on the bottom line. PE has money burning in their pockets and walked - don't understand why a pandemic changes anything fundamentally.

 

Maybe not enough to move the needle, but pharmcists have been given the ability to order and adminster COVID-19 tests.

 

https://www.hhs.gov/sites/default/files/authorizing-licensed-pharmacists-to-order-and-administer-covid-19-tests.pdf

 

Seems like a good way for Walgreens and CVS to drive some business.  Walgreens seems very well set up to be a retailer that thrives during the current situation.  They already have many drive through locations and mail order available.

 

We've been buying more stuff (front of store) from our local pharmacy lately. It has a wide assortment, and is smaller and not busy, so seems safer.

 

If they start offering covid tests there I'll stop going completely.

 

What if they offer drive-through tests?

 

Good point, and would obviously be better. The specific location I'm thinking of would have a hard time with that I suspect, but many/most would not have trouble.

[LearningMachine]

During the current Covid situation, some of us might have realized the need for same-day prescription delivery.  Walgreens has been able to offer delivery through FedEx but not same day.  In the recent quarterly call, Walgreens mentioned it hitting their opex, and that it is cheaper for them to have folks pick up from store.

 

The same used to be true for other retailers before Amazon started focusing on customer satisfaction resulting from fast delivery, even if it meant lower margins for a while.  Many retailers have been going under as a result.

 

The prescription industry is late to this due to some reasons, one being that only pharmacists can dispense prescriptions.  Now, a lot of money is chasing this:

• http://amazon.com/pillpack:  Amazon acquired Pillpack recently, and has been slowly getting licenses in several states. If they were to introduce same-day prescription delivery within 2 hours when customers tell their physicians Amazon is their pharmacy, I'd probably use it, even post-Covid.
  
• http://medly.com: Medly is getting NPS score of 86, and just raised $100 million to go national, which helps with brand recognition
  
• http://capsule.com: Capsule has been delivering in NYC area and raised $200 million to expand to other large cities.
  
• https://nowrx.com/: NowRx has been delivering in Bay area and has 30,000+ customers and delivered 200,000+ prescriptions, has NPS of 60, and their sales have been growing exponentially (80% annually).
  
• https://alto.com/: Alto recently raised $250 million, headed by SoftBank. They deliver for free. Most medications are delivered same day.  They try to find you cost savings. Great customer satisfaction stories of them going above and beyond in satisfying customers.
  

 

 

With all of this money chasing last mile of the prescription delivery problem, do we think at least one if not some of them will be successful in taking away share from Walgreens and CVS?  When the retailers are growing market share, it works out very well for shareholders, but when they are on the way down, it usually works out terribly for shareholders and that too, fast.  What do folks think?

[Spekulatius]

I don’t follow WBA closely, but I do follow and own CVS.

 

1) It is correct that CVS and WBA prefer that you pick up meds at their pharmacies. There are several reasons for this - no shipping costs and it gives them an ability to offer other products and services. CVS store pickup is also pretty convenient in most cases, as a there 70% of the US population has a CVS pharmacy within 3 miles.

 

CVS used to be pharmacy only, but now they bought Aetna health insurance sort  are sort of integrated and now offfer Pharma, health insurance, but also services like testing, flu shots, minute clinics etc. This is all supposed to work synergistically - for example then they bought Aetna, they started to drive insurances customer through CVS Caremark exclusively ( which hurt WBA). This is sort of what UNH has been doing, starting from health insurance when they got into Pharma distribution and owned a piece of health clinics etc and got this to work synergistically. Kaiser is a nonprofit health insurer and was fully integrated including an In-house pharmacies (from my perspective as an insurance customer this was working very well).

 

Ok, this is a long way of saying that I believe (and many industry players too) that integration is the future of health care and single line business (like pharmacies be it online or B&M )  are most likely not the future.

[LearningMachine]

Thanks Spekulatius, I see what you are saying regarding integration providing value.  I've been a Kaiser customer as well and have noticed the value. I see that Walgreens is also heading in the same direction with having partners open clinics but shutdown its own clinics because they were not profitable. 

 

In comparing Walgreens and CVS, I notice the following:

 

I realize that pharmacy margins are under pressure from PBMs and insurance.  This will probably take out more independent and smaller chains that don't have negotiating power to get lower prices on generics and branded medication, while lowering profits of all pharmacy chains.  Overall, looks like Walgreens should be able to survive but with lower profit margins.  Walgreens and CVS will probably end up gaining market share during all this by taking out smaller chains and independent pharmacies.

 

I understand that by buying Aetna, CVS has made itself somewhat immune from pressure from PBMs and insurance, and will end up getting the benefit of cost savings from running the integrated system.

 

Between CVS and Walgreens, overall, I wonder who has stronger monopsony power with suppliers.  I understand in the U.S., CVS has higher market share when combining their PBM and insurance.  Worldwide, with Walgreens having decent volume in Europe, and 40% interest in a chain in China, I wonder if Walgreens has a stronger negotiating power with suppliers?  I couldn't find comparisons readily available.  I was wondering if anyone has looked into that as it will save me some digging up.

 

Looks like Walgreens' answer to PBM is to go with RxAdvance.com, but that site looks like a bunch of marketing videos to me, and I am not able to figure out what value it provides.

 

On the insurance side, if U.S. ends up going into the same direction as Canada longer term, with public insurance option being available to everyone, I wonder if that will cut into insurance profitability and market share of CVS/Aetna.  If insurance company values will go down, I wonder if CVS overpaid for Aetna, and Walgreens is thinking owning an insurance may not be necessary longer term.

 

So, I wonder if longer term, the entity that can have stronger monopsony power over suppliers through higher market share with consumers is the one that will end up winning the most.

 

Would love to hear your thoughts on each of these points.

[Spekulatius]

I believe the future of healthcare is a more integrated system, similar to single payer healthcare in Europe or Kaiser in the US. I have experience with both as a customer and Kaiser in my opinion is a superior Customer experience  to UNH or ANTM PPO or HMO (I had thermally over the years).

 

The reason is simple - more streamlined customer experience and workflow ,less friction (with patient data, billing) and quicker service. Go into a Kaiser building, get Kaiser, MRI or X-RAY, blood testing and  your Kaiser doc can look at all this , refer to an In house specialist, wrote a prescription etc. You can be out in an hour or two vs needing several days to get all this scheduled at various locations and receive a boatload of bills.

 

UNH tries do this a bit coming from the insurance side and now CVS tries to do the same coming from the prescription/retail side. I think standalone entities like WBA or even hospitals, drug stores, may be a hard time competing with this.

 

Scale only goes so far and is more determined by local market share rather than world wide market shares, at least with drug distributions and insurance.

 

CVS probably overpaid for Aetna as the multiple was rich when acquired but Aetna outperformed their initial projections when you look at the acquisition docs, so it was probably an OK acquisition. It did pressure the stock in the short Term (couple of years), but now the debt is getting worked down to 3x EBITDA (it was ~4.5x at acquisition or even higher) there is an opportunity to become more shareholder friendly and perhaps also invest more internally. That’s why I am bullish for CVS because so far, Mr Market hadn’t given them any credit and regards and values it like a melting icecube.

 

While there is still risk, there a good chance that this will go alright and if they continue to gain traction, it really shouldn’t trade st 8-8.5 x earnings and a 10%+ FCF yield but rerate. At least that’s my thesis at this point.

 

 

[KCLarkin]

Between CVS and Walgreens, overall, I wonder who has stronger monopsony power with suppliers.  I understand in the U.S., CVS has higher market share when combining their PBM and insurance.  Worldwide, with Walgreens having decent volume in Europe, and 40% interest in a chain in China, I wonder if Walgreens has a stronger negotiating power with suppliers?  I couldn't find comparisons readily available.  I was wondering if anyone has looked into that as it will save me some digging up.

 

Read drugchannels.net and follow Adam Fein. (also note the sourcing co-ops like CVS/Red Oak)

 

I own CVS and don't follow WBA closely anymore. WBA's strategy was to focus more on high margin beauty products. And then partner to try to cobble together the healthcare business through partnerships. CVS is laser-focused on the healthcare business.

 

CVS and WBA aren't comparable businesses anymore. More interesting is to look at CVS versus UNH.

 

From afar, it looks like WBA's strategy failed. CVS strategy seems much better in current environment, but there is enormous regulatory risk.

[LearningMachine]

I believe the future of healthcare is a more integrated system, similar to single payer healthcare in Europe or Kaiser in the US.

 

I see the value of integrated myself, but I am not sure if all customers will value integrated experience over autonomy.  My company offers choice between (1) Kaiser's fully integrated plan for free and (2) autonomy plans where employees have to pay a co-pay and deductible but have lot more choice over providers.  To my surprise, almost all employees pick #2 because they like to be able to go to the best providers and not be locked inside the Kaiser network.

 

Also, Canada has a single payer healthcare, but patients can pick any doctor and any pharmacy they like.

 

So, I think we can't say with a reasonable probability that integrated system will work over customer autonomy.

 

NPS scores can be a leading indicator of market share as they tell you how much actual customers who have used the product/service are recommending the product/service to their friends and family.  Here are the current NPS scores to consider that I was able to find:

• Aetna: 16
  
• CVS: -5
  
• Amazon Pillpack: 80
  
• Alto: 80+
  
• NowRx: 59
  
• Walgreens: 25
  
• Village Medical at Walgreens: 90
  

 

Seeing NPS of Amazon Pillpack and Alto compared to Walgreens and CVS reminds me of how Netflix and Redbox killed Blockbuster.  What do folks think is the probability that Walgreens will end up being like Blockbuster vs. Walmart given Amazon Pillpack, Alto, NowRx and other online providers have higher NPS and growing exponentially, starting to steal market share?

 

That said, regarding Village MD, what do folks think about NPS of 90 and market share of 50% for Walgreens after everything is settled that was claimed in the latest quarterly call (excerpt below)l?  Do you think Alex meant 50% market share among patients who go to VillageMedical or do you think he really meant that they expect Walgreens market share will go from 20% to 50% when VillageMedical is all rolled out?

 

 

 

---------------------------------------------------------------------------------------------------------------------------

Alex Gourlay -- Co-Chief Operating Officer for Walgreens Boots Alliance, Inc., and President, Walgreens

 

...

The other thing that's important to understand in the short term has been the NPS score. The NPS scores are over 90%. So this is a really fantastic feedback, and the way that these particular VillageMDs[VillageMedicals] are designed is really strong from the point of view of your local surgery, quite different, and I hope you've seen the pictures to what many local surgeries look like today. And last, but not least, of course they are very good as a practice, and as a Company with the software they have.

...

Well, what I can describe is that, you know Walgreens gets 20% of an average market share, you can expect us to be well above 50% when these with -- of market share when these settle down.