Solving retail pharmacy's identity crisis
In case the last month hasn't made it clear, retail pharmacy giants are in a deep identity crisis.
Why it matters: Millions of patients rely on retail pharmacies for their prescriptions — but these companies need to be more than that going forward.
Driving the news: Retail health giants CVS and Walgreens are closing thousands of locations, replacing C-suite leaders and undergoing strategic reviews.
Friction point: Pharmacist shortages and labor issues, coupled with growing complexity with drug reimbursement, have stressed pharmacy operations since COVID, says Deloitte managing director George Van Antwerp.
- Integrating pharmacists more tightly with clinical prescribing should, in theory, cut costs and improve outcomes — but the formula has proved tricky, Van Antwerp says.
Between the lines: A more streamlined fulfillment infrastructure would go a long way toward achieving integration, says Barclays analyst Stephanie Davis.
- She cites the micro-fulfillment center strategy that Walgreens put on ice last year as an example.
- "You're able to practice at the top of your license by having the warehouse bots handle the routine task of grabbing and filling scripts," she says.
Threat level: Evolving consumer preferences and competition from online players are driving legacy players to focus more on digital offerings — but perhaps not quickly and meaningfully enough.
- "I do worry about Amazon Pharmacy quite a bit for these names," Davis says. "There should just be a much stronger e-commerce strategy."
- Amazon just expanded same-day delivery, as did Walmart. While both CVS and Walgreens also offer it, persistently locked-up merchandise makes the shopping experience more difficult, particularly for delivery workers at services like Instacart.
Catch up quick: In the last two years, CVS and Walgreens paid handsomely to acquire value-based care providers in a bid to tighten their grip on the care life cycle.
- Walgreens is walking back that bet as it continues to search for acquirers for its VillageMD unit.
- "Urgent care was incredibly important during COVID, so they acquired to accelerate entry into the space rather than use their own retail footprint," Davis says of Walgreens.
- Meanwhile, CVS is contending with the side effects of its vertical integration push for the last eight years amid heavier regulatory scrutiny of its PBM and a Medicare reimbursement squeeze on Aetna.
Reality check: CVS' pharmacy operations and its balance sheet are in a better place than Walgreens'.
- Total revenues for its pharmacy and consumer wellness (PCW) division increased 3.7% in Q2 from the year-prior period, driven by increased prescription volume and pharmacy drug mix.
- "PCW actually has been a source of upside for CVS for the past few quarters," Davis says. CVS ended Q2 with $12.51 billion in cash and cash equivalents, up from the $9.8 billion in cash at end of Q1.
- Despite Aetna's drag on CVS' stock, CVS executive chairman Roger Farah said a breakup isn't a likely outcome.
What's next: The two giants face different crossroads in the short term.
- Walgreens has a huge wall of debt coming due ($1.4 billion in fiscal 2025 and $2.8 billion in fiscal 2026) and needs to unlock cash quickly. Theoretically, it should be able to do that with a sale of VillageMD — but the buyer universe is limited for that asset, particularly given how publicly the division is losing money.
- CVS is under pressure to bring up share prices, which have fallen steeply. New CEO David Joyner will be responsible for solving the problem of Aetna, whose medical loss ratio is set to increase.
- Joyner has cited plans to create a new type of drug coverage for health plan customers, but it's likely we'll see Aetna pull back benefit offerings to Medicare Advantage members after expanding it significantly this year.
What we're watching: CVS releases Q3 earnings on Wednesday.
