Walgreens’ (NYSE: WBA) illustrious past devolves to private equity buyout

Walgreens Boots Alliance (NYSE: WBA), begun as just Walgreens in 1901, was once a flagship US company. With thousands of locations, it offered a pharmacy in the back and consumer staples in the front of its stores.

But Walgreens has tanked over the past decade, due to shifting fundamentals in the pharmacy and retail industries and poor decisions by management. 

The company’s stock has plunged 87% during that period. And now the struggling former stalwart has agreed to a $10 billion leveraged buyout by private equity firm Sycamore Partners. That’s less than 10% of its market-cap 10 years ago.

So what happened? On the pharmacy side, pharmacy-benefit managers (PBMs) took over during the past 30 years in negotiating drug prices between insurance companies, pharmacies, and drug manufacturers. 

That can hurt pharmacies like Walgreens, because the PBMs often set low reimbursement rates on the payments pharmacies receive from insurance companies. And pharmacies can no longer negotiate drug prices directly with manufacturers to obtain favorable terms. 

Walgreens’ arch competitor, CVS Health (NYSE: CVS), responded to the rise of PBMS by buying one — Caremark in 2007. Walgreens stood pat until 2013, when the company began a partnership with pharmacy benefit manager AmerisourceBergen, now Cencora (NYSE: COR).

On the retail side, the company got hit as consumers turned to the Internet to make purchases. They had no need to visit Walgreens stores, as they could buy staples at rock-bottom prices on Amazon.

Business mistakes at Walgreens

Then there was mismanagement. Walgreens bought Boots Alliance, a chain of UK drugstores, for $10 billion in 2012. But that and the acquisition of thousands of Rite Aid stores just made Walgreens bigger, not better.

In 2013, the company agreed to open dozens of blood-testing clinics in its pharmacies. The 41 clinics that opened used testing by Theranos, led by Elizabeth Holmes. The company turned out to be a fraud, and Holmes is now in jail.

Walgreens invested $1 billion in VillageMD in 2020, putting its primary-care clinics in Walgreens stores. But that move didn’t help either, as the clinics failed to attract many patients.

So where does this leave Walgreens’ main rival CVS? It seems to have responded more nimbly to changes in the pharmacy business than Walgreens. In addition to Caremark, it bought insurer Aetna in 2018 and healthcare service provider Oak Street in 2023.

“CVS’ top-tier retail pharmacy, health insurer, and PBM [pharmacy-benefit-management] franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients,” wrote Morningstar analyst Julie Utterback. 

The company generates about equal profits from its three major segments: insurance, pharmacy benefit management and retail pharmacy. And the Oak Street purchase could move the needle too, analysts say.

So while Walgreens is a company of the past, CVS seems to have solid prospects going forward.