- Walgreens is having a tough time.
- The pharmacy giant’s stock dropped 10% so far this year, after its financial results missed Wall Street’s expectations. The company finished 2019 as the worst-performing stock on the Dow Jones Industrial Average.
- Declining reimbursements for prescription drugs, competition with other retailers, as well as more sales going to online sellers like Amazon have put the retail pharmacy business in a rocky spot.
- Walgreens is betting that partnerships and an emphasis on tech will help it recover. That includes work with Microsoft on “health corners,” the first of which are opening this month.
- The 12 pilot sites will be in two Tennessee cities, Memphis and Knoxville and will have dedicated pharmacists manning two rooms that can be used to counsel customers on their medications or digital devices.
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Walgreens is hoping the pharmacy of the future will look something like the stores it’s currently setting up in Tennessee.
The beleaguered pharmacy giant is adding “health corners,” to a dozen stores in Knoxville and Memphis. They’ll be a testing ground for Walgreens to figure out whether the model could work in more stores around the US.
The clinics are emblematic of Walgreens’ strategic approach over the past few years. CEO Stefano Pessina has pinned the company’s future on partnerships with the likes of tech giants Microsoft and Alphabet, grocers like Kroger, and others ranging from FedEx to Jenny Craig.
The “health corner” clinics, for instance, are the product of a partnership the pharmacy giant struck up with Microsoft a year ago.
Walgreens is emblematic of the challenges facing pharmacies, and investors are worried
Investors, however, haven’t been swayed, continuously citing the pressure the business faces on getting paid for the drugs pharmacists dispense. The pharmacy giant finished 2019 as the worst-performing stock on the Dow Jones Industrial Average and has slumped another 10% already this year, after the company’s financial report fell short of expectations.
“No matter what they do it won’t be enough to offset the macro environmental challenges,” Baird analyst Eric Coldwell told Business Insider. “They need to figure out something much more, which is, ‘What is Walgreens?'”
Declining reimbursements for the prescription drugs, competition with other retailers, as well as more sales going to online sellers like Amazon have put the retail pharmacy business in a rocky spot, a problem that extends beyond Walgreens. Pharmacy companies like Rite-Aid, independent stores, and pharmacies owned by grocery stores have all been struggling, Coldwell told Business Insider.
“Walgreens is emblematic of the challenges you’re seeing in simple non-vertically integrated pharmacy,” he said.
The Tennessee pilot locations are intended to face those challenges. They’ll have two clinic-like rooms where a pharmacist will be able to sit down with patients and answer questions — either about their medications or health-tech devices. With Microsoft’s help to analyze the visits happening in the health corners, the goal is to find a model that’s useful for Walgreens’ customers, Jared Josleyn, Walgreens’ vice president of innovation, told Business Insider.
Walgreens wants to be more like its biggest rival, CVS Health
With the clinics, Walgreens is trying to show that it can act like a vertically-integrated healthcare company, without actually owning a health insurer or a pharmacy-benefits business. The company’s biggest rival, CVS Health, owns a health insurer and pharmacy-benefits manager and operates clinics.
Vish Sankaran, Walgreens’ chief innovation officer, told Business Insider he can build “virtual verticals.” He wants to achieve the benefits of owning things like a health insurer and pharmacy benefits, medical services, and a pharmacy, without actually buying up all of the businesses. The aim is to partner with local insurers and other healthcare firms, instead.
“We do not believe we can solve this challenge for the country by doing everything on our own,” Sankaran said. “We have to go into markets, we have to empower our so called partners in the local market, whether it’s a payer, a provider, the suppliers in the market.”
Pessina has said this work is closely tied to the company’s efforts to improve its technology. The company has four strategic priorities, which hinge on its tech strategy, including moving to the cloud and building new services on that data that helps Walgreens run better.
“Clearly, this work on the digitalization of our company must and are closely tied with our work to modernize our retail offering and the shape and structure of our retail footprint,” Pessina said on a call with investors.
‘We need to get off the fence on the models we want to pursue’
At the J.P. Morgan Healthcare Conference, analyst Lisa Gill pressed the company to explain its disappointing performance, and asked whether the partnership strategy is the right approach.
Alex Gourlay, Walgreens’ co-chief operating officer, defended the company’s strategy. Another executive, Chief Financial Officer James Kehoe, acknowledged that the company needs ot be more decisive as it picks which partnerships it wants to expand on, mentioning collaborations with the health insurers Humana and UnitedHealth and with VillageMD.
“I push it internally, and we need to get off the fence on the models we want to pursue and decision moments when we’re going to do it,” Kehoe said.
In fact, Walgreens has faced criticism for appearing to be trying lots of different small partnerships that aren’t likely to make much of a difference to its financials. As Coldwell put it: “They’re throwing mud against the wall,” to see what sticks.
“They know they need these things to offset the continual reimbursement pressure. But they don’t know exactly what the optimal look of a store is,” Coldwell said.
Our visit to a Walgreens store
Richard Ashworth, the president of operations at Walgreens, said the company is still experimenting to figure out what services will encourage customers to come in to a Walgreens store.
Business Insider interviewed him during a December trip to a Walgreens store in Deerfield, Illinois, down the road from Walgreens’ headquarters, That store contains an optical center, a room for lab testing, and a a room to evaluate hearing loss adjacent to the pharmacy.
Ashworth said that using these extra services to grow Walgreens revenue hasn’t been a focus.
“We’re not too focused on the math, so it’s more just focused right now on getting customers to engage and be able to then stick with,” Ashworth said.