Sunday, 21 April 2013

Doctor Walgreens will see you now

Walgreens (WAG) is America's largest drugstore chain. WAG has over 8,000 locations in America with 65% of the population within a 5 kilometre radius. WAG is benefiting from two powerful trends. The aging of the population with more than 10,000 Americans turning 65 every day and the increasing penetration of generic drugs. 2/3 of WAG’s sales are prescription and on average generics generate gross profits of $15 per script compared to branded of $8-$10. Management have plans for WAG to be not just a drugstore but a health and wellness destination.


Health and wellness destination?

The CEO believes they can be more than just a store that fulfils prescriptions. "With nearly 70 percent of the U.S. population either without a primary care physician or not utilizing one, and more than 30 million people gaining insurance coverage in 2014 under health care reform, we are well-positioned to fill the void in care,”Greg Wasson, CEO. Having the largest drugstore footprint means convenience for customers and provides an alternative to expensive physician or hospital care. WAG will be the option for customers if they cannot get a doctor's appointment and need after hours help.

WAG believes that they can can lower healthcare costs by delivering health services such as flu shots, health testing, coordinated wellness care and work-site health centers. The work site centres are particularly attractive for companies as instead of employees taking a half day off they can visit the on site clinic run by WAG. It also means enhanced selection such as fresh foods and beauty in addition to health care services.

Health and wellness to the world
WAG is aiming to create the first global pharmacy led health network. WAG has acquired a 45% stake of Alliance Boots in the UK (the largest pharmacy chain in Europe) with plans for full ownership by 2015. Together these two companies are betting that they can create a global drug chain. Consolidating their purchasing power will result in large synergies for the combined company.

Earn reward points by walking?
Last September WAG launched its first ever rewards program. Shoppers can earn points buying items, filling prescriptions, being immunised and joining the company's healthy-lifestyle programs, like Walk With Walgreens. That's right points by walking!

Utilizing technology WAG has made their reward card mobile. Downloading the rewards app customers can scan their phone at checkout no need to carry a card. In just 6 months WAG has enrolled more than 60 million customers. This helps WAG to reduce marketing costs by moving away from print promotions to digital within their rewards loyalty program.

Technology is making WAG even more convenient for customers with mobile apps. This year, the company launched its Pill Reminder mobile app and expanded its mobile prescription refill and transfer capabilities. WAG has also created an in-store map that allows customers to use a digital shopping list to map and locate items in a store and a “find your pharmacist” tool. This tool allows customers to select a pharmacist by matching their health care needs to areas of expertise, like specialties, languages and clinical backgrounds of Walgreens pharmacists. These tools differentiate WAG from independent chains which are estimated to account for 20% of the industry.

Taking the red pill

As with every investment there are risks, ongoing reimbursement pressure from payors like Express Scripts have negatively impacted WAG. Express Scripts is basically the middleman between drug makers and employees, Express pays pharmacies to dispense the drugs to their customers. Hundred of thousands of Express Scripts customers were shut off due to disagreements over payment reimbursement. The dispute last year was estimated to have cost WAG more than $4 billion in revenue. Customers either switched to another pharmacy or paid more for drugs if they stayed with WAG. Both parties have agreed to a new multi-year service agreement however WAG now has to win these customers and their prescriptions back. I suspect that WAGs move to become a health and wellness destination has been motivated to decrease reimbursement pressure.

Reality or wonderland
Just like the Matrix as an investor you have a choice. "You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland, and I show you how deep the rabbit hole goes." Well this is a little less dramatic. In this case no matter what reality you are in WAG is benefiting from longer term trends like the ageing population and the increased usage of generics. There are also shorter term trends like a mobile rewards card and other mobile technology. WAG looks good no matter the choice.

Disclosure: Decisive is long WAG

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.