Dive Brief:
- Walgreens announced a 2024 earnings outlook below Wall Street expectations on Thursday, two days after announcing a new chief executive officer who the beleaguered retailer says will help with its strategic pivot to healthcare services.
- Along with the release of its fourth quarter earnings, Walgreens said it expects adjusted earnings per share for its 2024 fiscal year to be between $3.20 to $3.50, below the analyst consensus of $3.71, due to lower profit from COVID-19 testing and vaccines among other factors.
- On a call with investors Thursday morning, Walgreens leadership said the Deerfield, Illinois-based retailer is focused on accelerating the profitability of its U.S. Healthcare division, which includes value-based medical group VillageMD. As part of that, Walgreens plans to close 60 underperforming VillageMD clinics next year.
Dive Insight:
On Tuesday, Walgreens named Tim Wentworth, a former Cigna executive, as its new CEO effective Oct. 23. Wentworth is joining the company at an inflection point for its growth strategy, as Walgreens looks to build on its traditional retail pharmacy roots to deliver healthcare services for payers, providers and other healthcare industry clients.
Core to that strategy is Walgreens’ U.S. Healthcare division. Along with VillageMD, the unit also includes at-home care provider CareCentrix, specialty pharmacy Shields Health Solutions and a fledgling clinical trials division Walgreens launched last year.
VillageMD’s pro forma sales grew 17% in the fourth quarter, helped by more lives in lucrative value-based arrangements, the expansion of its clinical footprint and increased fee-for-service volume as clinics mature, according to interim CFO Manmohan Mahajan.
CareCentrix grew 24% and Shields grew 29%.
Though U.S. Healthcare has steadily grown revenue, the unit has not ramped up to profitability as quickly as Walgreens had wanted and reported an adjusted operating loss of $83 million in the fourth quarter. The company hopes to change that next year.
“While we have made progress with the buildout of our business, we are not satisfied on the near-term return on our investments,” said John Driscoll, president of U.S. Healthcare, on the Thursday call. “We will continue to build in 2024, but with a renewed focus on profitable growth.”
VillageMD and its recently acquired medical groups Summit Health and CityMD are expected to be the most meaningful drivers of U.S. Healthcare’s growth in 2024, but it’s taking longer than expected to create cost synergies between the businesses, Driscoll said. That’s driving Walgreens’ plans to exit the underperforming clinics in five U.S. regions in 2024, so Walgreens can focus more heavily on growth in regions where it has more market power. The exits represent about 9% of VillageMD’s overall footprint.
Walgreens plans to be stricter about expense growth moving forward, both in U.S. Healthcare and the larger corporation. Over the last six weeks, Walgreens has “aggressively” reduced unnecessary costs through steps including closing unprofitable stores and reducing projects, interim CEO Ginger Graham, a member of Walgreens’ board, said on the call.
Walgreens plans to reduce capital expenditures by $600 million in its 2024 fiscal year compared to 2023.
Along with the VillageMD, Shields and CareCentrix growth, Walgreens’ clinical trials unit has expanded, inking 15 contracts to date, Driscoll said. The division connects drug companies with participants for potential trials and studies.
In addition, Walgreens is going deeper into value-based payment arrangements through a recent deal with provider enablement company Pearl Health to stand up what is essentially a managed services organization for independent physicians. Together, the two will manage about 9,000 lives in the Medicare direct contracting program ACO REACH in 12 markets next year, according to Driscoll.
The factors led Walgreens’ to expect adjusted EBITDA for U.S. Healthcare to break even or be positive in 2024.
