Walgreens Profit Squeezed by Generic Drugs -- 2nd update

By Sharon Terlep and Aisha Al-Muslim 

Walgreens Boots Alliance Inc. needs a new business model to offset thinning profits from the sale of generic drugs, which continue to drag down results, the drugstore chain's chief executive said Thursday.

The comments from Stefano Pessina came after the Deerfield, Ill.-based company said profit fell in the latest quarter from a year earlier even as sales increased.

While the results are an improvement from the previous quarter and better than analysts expected, Walgreens remains squeezed by pharmacy-benefit managers, which wrest lower prices from both makers and sellers of drugs on behalf of insurers and other clients.

Walgreens and rival CVS Health Corp. have been remodeling hundreds of stores into medical-service centers targeted at customers with chronic conditions such as diabetes, heart disease and hypertension.

Their plan comes as both chains are under pressure to find new ways to counter slowing revenue from prescription drugs, especially generics, which drive the bulk of their sales.

Mr. Pessina said the company must become less reliant on drug reimbursements and find new revenue streams, which requires overhauling its business.

"We have a lot of work ahead to get the business growing again," Mr. Pessina said on a call with analysts, adding that the company must proceed cautiously in launching new ventures. "We are far from complacent about the pressure we face."

Walgreens improved U.S. retail sales, U.S. same-store sales, and prescription growth in the most recent quarter.

For the third quarter ended May 31, profit fell 23.6%, partly driven by its gross profit falling. Gross profit decreased in the quarter about 4.2% as the company faced reimbursement pressure in pharmacy and lower retail sales in the U.S., as well as a lower pharmacy margin and retail sales at Boots UK, the company's retailer and pharmacy chain in the U.K.

Net income slipped to $1.03 billion, or $1.13 a share, down from $1.34 billion, or $1.35 a share, a year earlier. Adjusted earnings came in at $1.47 a share.

Walgreens said sales rose 0.7% to $34.6 billion, primarily due to growth in its U.S. retail pharmacy and pharmaceutical wholesale divisions.

In the quarter, U.S. retail pharmacy sales rose 2.3% to $26.5 billion, reflecting higher brand inflation and prescription volume.

Same-store pharmacy sales increased 6%, while comparable retail sales were down 1.1% primarily due to the continued de-emphasis of tobacco.

Shares rose 4.5% to $54.75 in midday trading Thursday. Shares are down 17% in the past year.

For fiscal 2019, Walgreens maintained its expectations of adjusted earnings per share at constant currency rates to be roughly flat.

Write to Sharon Terlep at [e-mail] and Aisha Al-Muslim at [e-mail]

(END) Dow Jones Newswires

June 27, 2019 12:16 ET (16:16 GMT)

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