Walgreens (NYSE:WAG) is a U.S. drug retailer that sells both prescription and non-prescription drugs as well as retail merchandise (cosmetics, convenience foods, photo processing services, seasonal merchandise, etc). In addition to its store offerings, Walgreens provides pharmacy services like prescription fulfillment. The company operates roughly 7,000 retail locations in the U.S.
The company is principally in the retail drugstore business and its operations are within one reportable business segment.
The company sells three types of products:
Walgreens recently launched a new campaign in 2011 to push for its own private-label brands, and decided to take the advertising across the country to promote its branded Health and wellness products. This is the first time Walgreens has gone beyond the Sunday paper to advertise their own brand, which emphasizes price and quality as the central themes.
Continued high unemployment has created a market for private-label products that are almost or exact same in quality but are different in price due to reduced marketing expense. These private-label products have especially caught on, as a recent study by Opinion Research Corporation stated that of 1,006 adults surveyed, 84% said they purchased store-brand OTC medications when they are available and 36% have increased these purchases of store-brand products last year. kljeadkfjaskdjfaskjdfaslidfjaifj;laisjdf;ailsjfa;sidjfol
Walgreen's revenues come mainly from pharmacy sales (65% in total) and partly from front store sales. Though medical costs such as prescriptions are not discretionary expenses and thus less vulnerable to an economic downturn, patients still migrate towards lower cost generic drugs instead of more expensive brand name drugs. Walgreens stands to benefit from this, as they receive higher levels of reimbursement from groups like Medicare for generic drugs. Additionally, CVS Chief Executive Tom Ryan says that very little of front store sales comes from "true discretionary sales," meaning that same store sales won't be affected by penny-pinching consumers. A weak economy also means higher costs. These costs have a large negative impact on the company's bottom line.
While Medicare Part D had over 29.3 million enrollees (many of whom who were previously uninsured), many of these used to be Medicaid patients. Medicaid reimburses more for drugs than Medicare, so cuts in the former and increases in the latter have resulted in two competing effects on pharmacies: more customers but lower margins.
At the same time, certain provisions of the Deficit Reduction Act seek to reduce federal spending by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs. These changes are expected to result in reduced Medicaid reimbursement rates for prescription drugs. In addition, a class action settlement with two entities that publish the average wholesale prices (AWP) of drugs, AWPs have been reduced for many brand-name prescription drugs. While Walgreen’s has reached understandings with most of its third-party payors to adjust reimbursements to correct for this change in methodology, but state Medicaid programs that utilize AWP as a pricing reference have not taken action to make similar adjustments, resulting in reduced Medicaid reimbursement for drugs affected by the change.
The Patient Protection and Affordable Care Act, the much awaited and much debated health reform law signed into law on March 30, 2010 by President Obama, may indirectly help US pharmacies by encouraging increased drug utilization, which could boost pharmacy sales.
First, the law is projected to expand insurance to 32 million Americans previously without coverage. Presumably, newly uninsured patients will increase their utilization of drugs. Part of this expansion of coverage is done through an insurance mandate, while part is done by an expansion of Medicaid eligibility. Partially offsetting the benefit accrusing from those newly covered under Medicaid will be the lower reimbursement rates paid by the program to pharmacies relative to cash customers (who pay higher prices but generally buy fewer drugs).
Second, the law partially fills in the Medicare Part D coverage gap, or "donut hole". This is a gap in Medicare prescription drug coverage that kicks in after a moderately high annual threshold of spending on prescription drugs is reached. Before then, Medicare generally covers about two-thirds of drug cost; after reaching the gap, the next $3,610 worth of drugs is fully paid for by the patient, after which Medicare covers 95% of all remaining costs. Beginning in 2011, they will also receive a 50% discount on branded drugs. Over the next nine years, a series of discounts and benefits will lead to elimination of the gap. This should make sicker patients with high drug spend less price-sensitive and thus also encourage drug utilization. 
Several external trends are currently increasing all pharmacies' revenues across the industry. In addition to increased sales of prescriptions, CVS will benefit as additional foot traffic for the pharmacy naturally leads to increased retail sales in the front end of the store.
Major drug manufacturers carrying common household OTC medications such as Tylenol, Advil, and Motrin are six times more likely to be purchased by consumers than its same function generics. The main idea behind this thinking, even though most often than not the drug facts are the same, is consumers grew up with these brands and perceive them as safer or more effective than inferior goods.
However, when in the rare case that these trusted household brands are recalled, consumers are often thrown into confusion and will make the switch over to retail pharmacy generics, sometimes permanently. This presents a very valuable opportunity for retail pharmacies.
As a result, all major pharmacies such as CVS, Walgreens and Wal-Mart have revamped private label drug manufacturing by five times capacity versus 2009. As traditional JNJ loyalist consumers are forced to use generics, they may realize that they are just as effective as Tylenol and JNJ, except cheaper. As such, these loyal consumers may choose to permanently change over, which presents an extremely lucrative opportunity for retail pharmacies.
Drugstore competitors to Walgreens include:
In addition to other drugstore retailers, Walgreens also competes for market share with supermarkets, convenience stores, mass merchants, dollar stores, Internet drugstores, and PBMs. In particular, Wal-Mart (WMT) has grown its retail pharmacy business at its retail mega-stores. Wal-Mart is the third largest domestic retailer in terms of pharmacy sales, and it has continued to increase the number of total pharmacies in its installed store base. Wal-Mart also announced a strategy to aggressively undercut prices of generic drugs compared to traditional drugstores such as Walgreens and CVS.
|Retail Pharmacy Industry — Competitive Operating Metrics (2009)||Walgreen Company (WAG)||Rite Aid (RAD)||CVS Caremark Corporation (CVS)||Wal-Mart (WMT)||MedcoHealth Solutions (MHS)|
|Revenue (billions of USD)|
|Revenue Growth from 2008||7.29%||-3.00%||12.87%||0.95%||16.67%|
|Net Profit Margin||3.17%||-1.97%||3.76%||3.66%||2.14%|
|Income Growth from 2008||-7.00%||N/A||15.01%||8.75%||16.08%|
|Earnings per Share||2.16||-0.43||2.56||3.76||2.61|