"Generic-Drug Trends Squeeze Walgreens' Profit"

PHOTO: MOHAMMAD KHURSHEED/REUTERS

  This WSJ blog post concerns Walgreens lower it's profit goal.  With a smaller profit coming from generic drugs transactions, Walgreens Boots Alliance (as well as rival CVS) has lowered it's earning goals. Its forecast and shares dropped to 13% just today (Tuesday 4/2).  Walgreens is currently  negotiating with pharmacy-benefit managers.  Known PBMs, they "[...] serve insurers and other clients by choosing which medicines to cover and wresting lower prices from both makers and sellers of drugs" (Terlep and Walker, 2019).  Unlike CVS, Walgreens does not have a large PBM, which can leave it vulnerable to pricing demands.  Walgreens' CEO Stefano Pessina states that pharmacy trends are and will continue to impact the overall market.  Evercore ISI analyst Ross Muken states that while Walgreens' generic drug prices are falling, it is not near as fast as reimbursement rates for insurers.  Muken continues, " The shrinking gap between the price Walgreens pays and the amount it receives after dispensing the drug is reducing the company’s profit margins [...]" (Terlep and Walker, 2019).  

  Eighty-five percent of U.S. prescriptions are generic and are usually more profitable than high name brands (i.e. Humira or Xerelto).  In fact, brand name drug prices are rising as generic drug prices are falling.  When buying generic drugs, pharmacy chains will leverage their purchasing power.  This is to be able to negotiate lower prices since there are more competitors.  The high volume of generic prescriptions makes up for the low profit.  Despite the low performance in the fiscal second quarter, Walgreens will still be pursuing partnerships.  Companies like LabCorp and Microsoft have been in partnership deals with Walgreens for several years.  The purpose is to increase the pharmacy's revenue while also getting customers to make other in-store purchases.  According to CEO Pessina, these partnership deals will not bolster lots of profit at first.  Pessina says, '"You don’t see the benefit for the time being [...][t]he investments will mature (Terlep and Walker, 2019)".  In the recent quarter, sales at Walgreens rose 4.6% at $34.53 billion (U.S. retail pharmacy rose 7.6% at $26.3 billion).Walgreens' company-wide retail sales dropped due to flu season, a drop in seasonal merchandise, and the shift to becoming tobacco-free.  By 2022, the company plans to reduce annual spending by $1.5 billion.

  I found this article to be very interesting because despite the amount of money spent on big name drugs, generic brands outsell them.  From my experience, I usually cannot tell the difference between big name drugs vs. generic.  In supply and demand theory, having many different drugs would lower the cost of the big name brand.  However, since there seems to be no specific chemical difference, the generic is bought more due to the cheaper price.  Going back to the principle of situational analysis, the Walgreens article addresses the company aspect.  It is clear that while generic drugs can be a strength (high volume), its lowering shares are indeed a weakness.  Moody's Vice President Mickey Chadha says, "[Walgreens' weak performance] demonstrates that there is no relief in sight from reimbursement pressure permeating throughout the pharmacy retail sector (Terlep and Walker, 2019).  Only time can tell if Walgreens can bounce back from its low performance.

Works Cited: Terlep, Shannon and Walker, Joseph.  Generic-Drug Trends Squeeze Walgreens' Profit.  Earnings, Business, The Wall Street Journal, Web, 2 April 2019.  2 April 2019.  https://www.wsj.com/articles/walgreens-cuts-earnings-guidance-after-a-challenging-second-quarter-11554204891?mod=hp_lead_pos1