Walgreens reported an almost $6 billion net loss in the second quarter, according to financial results released Thursday. Nearly all of that sum was attributable to the declining value of a single play: VillageMD, the primary care chain into which Walgreens has poured billions of dollars, but which has generated disappointing returns to date.
Walgreens was forced to write down VillageMD’s value after its financial team flagged a mismatch in the subsidiary’s value as recorded in its balance sheet and its value in the market, CFO Manmohan Mahajan told investors on a Thursday morning call. That discrepancy led Walgrens to record a $5.8 billion goodwill impairment charge.
It’s the latest difficulty for VillageMD, a business underpinning Walgreens’ beleaguered strategic shift to health services that’s suffered from falling growth expectations.
Walgreens initially invested $1 billion in VillageMD in 2020 before doubling down with another $5.2 billion investment a year later, making Walgreens VillageMD’s majority owner. Walgreens then embarked on a series of M&A to grow VillageMD’s network of physician offices.
But last year, Walgreens pivoted to pare back VillageMD’s footprint instead, to accelerate the division’s drive to profitability.
In the fall, Walgreens said it would close 60 underperforming clinics as part of a $1 billion cost-cutting goal. However, recent closures have eclipsed that figure.
On Thursday, executives said Walgreens has closed 140 clinics to date, and plans to close 160 in total.
To date, VillageMD has closed stores in Florida, Indiana, Illinois, Massachusetts, Rhode Island and Nevada, a company spokesperson told Healthcare Dive.
Overall, Walgreens beat Wall Street expectations for earnings and revenue in the second quarter, with a topline of $37.1 billion.
Yet questions Walgreens faced coming into the quarter around its new strategic direction remain following the earnings — especially given the company’s implied earnings trajectory for the rest of 2024 is “significantly below” analysts’ estimates, Leerink Partners analyst Michael Cherny wrote in a note on the results.
The company’s U.S. Healthcare division, which includes VillageMD, at-home care provider CareCentrix and specialty pharmacy Shields Health Solutions, has had a slower path to profitability than Walgreens expected, though it continues to ramp up sales.
In the second quarter, U.S. Healthcare’s revenue increased 33% to $2.2 billion, spurred by the acquisition of Summit Health, an East Coast medical group VillageMD purchased for almost $9 billion two years ago.
VillageMD’s sales grew 20% on a pro forma basis, in part due to more patient lives being added to full-risk arrangements. Shields grew 14% on a pro forma basis, thanks to more patients served due to recent contract wins and growth in existing partnerships, Walgreens said.
U.S. Healthcare posted its first quarter ever of positive adjusted earnings before interest, taxes, depreciation, and amortization, an achievement executives touted on the Thursday investor call.
Yet the division remains unprofitable, with an adjusted operating loss of $34 million. However, that loss is roughly half as large as analysts expected.
TD Cowen analyst Charles Rhyee wrote in a note he was “encouraged” by the winnowing losses. Walgreens said it expects the division to break even in adjusted earnings this year.
Along with the VillageMD clinic closures, Walgreens has also let a sizable chunk of its corporate workforce go over the past year, and offloaded assets, including stakes in home infusion provider Option Care Health and drug distributor Cencora.
Earlier this year, there was some speculation Walgreens would sell Shields — a potential move analysts slammed as Walgreens losing one of its highest-margin businesses. CEO Tim Wentworth shut down the speculation earlier this month.
Walgreens’ portfolio review will continue over the next three to six months, Wentworth told investors on the Thursday call.
“We have some things already underway as part of this, as we go from examining things to testing markets and so forth. I’m not going to get detailed at this point about that, other than to say again it’s dynamic, it is across the company,” Wentworth said.
