NYSE: WAG
Junying Shen
Xiaosi (Sarah) Song
Chi (Tracy) Zhang
Xiangyuan (Arthur) Zhong
Nov 6, 2012
2
Agenda
Introduction
Industry and Macroeconomic Overview
Company Overview
Relevant Stock Market
Financial Analysis
Financial Projections
Recommendation
3
Current Portfolio Position
• 500 shares bought on Oct 6, 1999 @ $25.00
• Current Stock Price: $ 34.89 (Nov 2, 2012)
• EPS: $ 2.24
• Unrealized Gain: 36.32%
WAG; 13%
WFR; 1%
ZIXI; 4%
ABT; 14%
PETM; 5%
AEO; 23%
MOS; 8%
JKHY;
11%
MCD; 13%
ABT
AEO
DO
DO; 8%
JKHY
MCD
MOS
PETM
WAG
WFR
ZIXI
4
Pharmacies & Drug Stores Industry Overview
•
•
•
•
Revenue: $238.5 billion
Annual Growth Rate since 2007: 1.7%
Profit: $5.2 billion
Major players:
▫ Walgreen 30.9%
▫ CVS Caremark 27%
▫ Rite Aid Corporation 11%
Source: WWW.IBISWORLD.COM
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Pharmacies & Drug Stores Industry Structure
Life Cycle
Stage
• Mature
Regulation
Level
• Medium
Revenue
Volatility
• Low
Barriers to
Entry
• Medium
Capital
Intensity
• Medium
Industry
Globalization
• Low
• High
Competition
Level
• High
Concentration
Level
Source: WWW.IBISWORLD.COM
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External Drivers
•
•
•
•
•
Per capita disposable income
Private Health Insurance Coverage
Aging Population
Medicare, Medicaid & Obamacare
Generic Drug Wave
7
Per Capita Disposable Income
• Per Capita Disposable Income determines a person’s
ability to purchase goods and services
• The growth is hindered by the negative Macroeconomic
outlook though
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Private Health Insurance Coverage
• Pros: Private health insurance membership can lower the price of
pharmaceutical and hence increase the demand for the industry
• Cons: Managed care organizations associated with health insurance
plans can give lots of pressure on drug price and cut profitability
margin
9
Aging Population
• Baby boomers are getting old and this will bring huge
opportunities for the industry because senior people has
a higher demand for medical services
Source: WWW.IBISWORLD.COM
10
Medicare, Medicaid & Obamacare
• Medicare and Medicaid subsidize prescription drug
purchases and can spur demand for the industry
• Obamacare is aimed at increasing the insurance
coverage, which may bring opportunities
• But you’ll never know until tonight….
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Generic Drug Wave
• After the expiration of the patent of a medication, a generic version
of the drug can be produced and sold
• Generic drugs have the same effect but are much cheaper compared
to brand name drugs
• Normally generic drugs have a higher gross profit margin for
pharmacy retailers, partially because of generic drug producers have
smaller bargaining power
• In the next few years, there will be lots of brand drugs lose patents
Source: WWW.IBISWORLD.COM
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Threats
• Pharmacy Benefit Managers
Third party administrator of prescription
drug programs, primarily responsible for
processing and paying prescription drug claims
• Diversified Supermarkets
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Pharmacy Benefit Managers
• PBMs are the primary contact of the pharmaceutical supply chain to
many patients
• PBMs’ major tools:
▫ Pharmacy networks: PBMs build networks of retail pharmacies to provide
customers convenient access to prescriptions at discounted rates
▫ Mail Service pharmacies: PBMs provide home-delivered prescriptions to
consumers
• PBMs aggregate the buying clout of millions of enrollees through
their client health plans to obtain massive bargaining power over
pharmacy retailers
• PBMs are encouraging consumers to use their mail service instead
of going to pharmacy retailers and also pressing the pharmacy
retailers to charge a lower price for the drugs
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Pharmacy Benefit Managers
• Major players:
▫
▫
▫
▫
Medco Health Solutions 32.3%
CVS Caremark 27.3%
Express Scripts Inc. 21.6%
UnitedHealth Group Inc. 9.8%
• Consolidation
▫ Express Scripts acquired Medco Health Solutions with $29.1
billion in 2012
▫ SXC Health Solutions bought Catalyst Health Solutions with
&4.14 billion in 2012
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Diversified Supermarkets
• Big retailers like Wal-Mart and King Soopers are
stepping into the pharmacy supply chain and
we’ve already seen pharmacy shops in many
supermarkets
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Walgreen Co. (NYSE: WAG)
Fiscal year ended: Aug. 31, 2012
• Incorporated: 1901 in Illinois, US, retail drug store chain:
Prescription, non-prescription drugs and general merchandise
• Net sales: $71.6 billion
• Net earnings: $2.1 billion
• Employees: 240,000
• Prescription sales: 63.2% (2012) vs. 64.7% (2011)
Revenue in Millions
Source: 2012 Walgreens Annual Report
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Number of stores and locations
Store Growth
Fiscal Year
New Locations
Acquisitions
Closings
Net Openings
2012
212
54
91
175
2011
261
36
133
164
2010
388
282
120
550
2009
602
89
129
562
2008
608
423
94
937
2007
501
120
85
536
Locations
Sales Area*
8385
87049
8210
85619
8046
83719
7496
78782
6934
72585
5997
66386
New store growth  expansion into new markets
Location Type
Drugstores
Worksite Facilities
Infusion and Respiratory
Services Facilities
Specialty Pharmacies
Mail Service Facilities
Total
Source: 2012 Walgreens Annual Report
2012
7930
366
# of Locations
2011
2010
7761
7562
355
367
2009
6997
377
76
83
101
105
11
2
8385
9
2
8210
14
2
8046
15
2
7496
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FY 2012 Overview
19
• June 21, 2011, unable to reach a contract agreement with pharmacy
benefit manager Express Scripts, Inc., exited the network as of Jan
1, 2012  sales impact
• Signed a multiyear agreement with Express Scripts to participate in
its broadest retail pharmacy on Jul 19, 2012
• On Sep 15, customers began to return  positive effect on WAG’s
net sales, earnings and CFs
Source: 2012 Walgreens Annual Report
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Launched its innovative Balance Reward loyalty program on Sep 16, 2012
As of Sept 28, 2012
Source: http://investor.walgreens.com/
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• Strategic partnership with Alliance Boots to create the first global
pharmacy-led, health and wellbeing enterprise
• Closed on first phase of the transaction in August, acquiring a 45%
stake. (Full combination in 3 years)
• Investment : $4.0 Billion in cash and 83.4 million common stock
• Multinational pharmacy-led health and beauty group
• Over 3,330 retail locations in Europe
Creating Value
Through Synergies
Source: 2012 Walgreens Annual Report
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Stock Performance Over 5 years
CVS
Source: Bloomberg
SPX
WAG
RAD
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Financial Analysis- Liquidity Measure
Quick Ratios: WAG vs. Industry
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Financial Analysis- Probability Indicator
ROIC: WAG vs. Industry
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Financial Analysis- Debt Ratios
Debt to Equity: WAG vs. Industry
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Financial Analysis
• Among Walgreens’ total stores:
▫ 20% owned
▫ 80% leased
• Caution: $35,356 mm (PV) of operating leases
are not reported on balance sheet, which are
their contractual obligations and commitments.
•  Significantly higher obligation level
27
Financial Analysis- Operating Performance
Inventory Turnover: WAG vs. Industry
* Accounting method of booking Alliance Boots acquisition do not allow us to
use asset turnover ratio.
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Financial Analysis- Investment Valuation
Ratios
PE ratio: WAG vs. Industry
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Financial Projection
• Step one:
▫ Invest a total of $6.7 bil. in cash ($4 bil.) and
stock (83.4 mil. shares) for 45% equity stake in
Alliance Boots
• Step two (after 2.5 years; done within 6 months) :
▫ At share price on Aug 2, 2012 and at exchange
rate of $1.55=£1, invest a total of $9.5 bil. in
cash($4.9 bil.) and stock(144.3 mil. shares)
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Financial Projection on Income Statement
• Income Statement
▫ 45% of Alliance Boots’ operating income added
to year 2013 2014
▫ 100% of Alliance Boots’ operating income
added to year 2015 2016 2017
▫ Interest expense of $3.5 bil. (w/ 2.2% weighted
average interest) added to year 2013 2014
▫ Interest expense of $4.9 bil. (w/ 2.2% weighted
average interest) added to year 2015 2016 2017
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Financial Projection on Balance Sheet
• Balance Sheet
▫ Use the equity method of accounting
 book Alliance Boots’ purchased equity into Walgreens
asset
 2012: 1st step, $6.7 bil. cash and stock
 2015: 2nd step, $9.5 bil. cash and stock
▫ Short Term Borrowing
▫ Long Term Borrowing
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Short Term and Long Term Borrowing
Source: http://investor.walgreens.com/
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Comparable Analysis
Price = $39.05
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Valuation
DCF
70%
Multiple
30%
$30.84
$33.31
$39.05
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Recommendation
HOLD