Strategy Assessment and Recommendations
Michael Aplington
Melissa Connolly
Shelly Hennig
Michael Holpe
Michelle Shah
Dilip Trivedy
11/29/2012
MGMT 590 Strategic Management Fall 2012
University of Illinois at Chicago
Contents
Introduction ..................................................................................................................................... 1
Retail Drugstore Industry................................................................................................................ 1
Prescription Drugs..................................................................................................................................... 2
Walgreen’s Resource Analysis ....................................................................................................... 2
Physical Assets .......................................................................................................................................... 2
Financial Resources ................................................................................................................................... 3
Walgreens Strategy – Current Direction ......................................................................................... 4
Leveraging the Medical Staff .................................................................................................................... 4
Expanding Take Care Clinics ...................................................................................................................... 5
Advancements in Information Technology ............................................................................................... 5
Walgreens Strategy – Moving Forward .......................................................................................... 6
Affordable Care Act (ACA)......................................................................................................................... 6
Partnerships with Affordable Care Organizations: ................................................................................... 7
In-Patient Transitions and Outpatient Pharmacies................................................................................... 9
Well Transitions ...................................................................................................................................... 10
Outpatient Pharmacies ........................................................................................................................... 11
Pharmacy Benefit Manager Business: .................................................................................................... 11
Strategic Uncertainties and Risks ................................................................................................. 13
Politics and the Changes in Healthcare Law ........................................................................................... 15
Increased Provision of Clinical Services .................................................................................................. 17
Financial Uncertainties............................................................................................................................ 18
Competition ............................................................................................................................................ 19
Other General Uncertainties ................................................................................................................... 20
Conclusion .................................................................................................................................... 21
Works Cited .................................................................................................................................. 22
Page |1
Introduction
Walgreens is the largest retail drugstore chain operating 8210 locations that include drugstores,
worksite health and wellness centers, infusion and respiratory services facilities, specialty
pharmacies and mail service facilities. (Walgreens, 2011) Walgreens offers its products and
services through drugstores, as well as through mail, by telephone, and via the Internet.
Retail Drugstore Industry
The retail drugstore industry is highly competitive. Competitors in this industry include retail
drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount
stores, dollar stores and mail order pharmacies.
The largest retail drugstores in the US are CVS Caremark Corporation, Walgreen Company and
Rite Aid Corporation. Together they account for 43.5% of the pharmacy market. All three
generate revenue by three product classes: prescription drugs, non-prescription drugs and
general merchandise. Prescription drug sales account for roughly two-thirds of all revenue for
each of the three largest retail drugstores.
2011
Retails Stores
Clinics
Net Income
Sales Revenue
Revenue by product class
Prescription Drug
Non-Prescription Drug
General Merchandise
Walgreens
7,761
355
$2.71B
$72.2B
CVS
7,300
549
$3,56
$107.1B
Rite Aid
4,665
14
($55.5)M
$25.21M
65%
10%
25%
68%
11%
21%
68%
9%
23%
Retail Drugstore Major Competitors
Page |2
Prescription Drugs
In 2011, the US retail pharmacy business generated $273.4 billion in revenue. The pharmacy
business is divided into two segments based on dispensing method. The first segment, traditional
brick and mortar retail pharmacies, relies on customers who go to a physical location to purchase
their prescriptions and consists of CVS, Walgreen Company, Wal-Mart Stores, Inc. and Rite Aid
Corporation. The second segment, mail order Pharmacy Benefit Managers (PBM), relies on
customers who receive their prescriptions through the mail and consists of CVS Caremark
Corporation and Express Scripts Holding Co.
Company
CVS Caremark Corporation
Walgreen Company
Express Scripts Holding Co.
Wal-Mart Stores, Inc.
Rite Aid Corporation
2011 Prescription Revenue (in billions)
$56.6
$45.1
$39.7
$17.4
$17.1
Market Share
20.7%
16.5%
14.6%
6.4%
6.3%
Pharmacy Market Share – Top Five Companies (Adam J. Fein, 2012)
Walgreen’s Resource Analysis
Walgreens is market leader with a multitude of resources including strong physical and
financial assets. The combination of these many resources lends to consistently strong
performance and overwhelming success.
Physical Assets
With over 8,000 locations, the sheer number of stores is one of Walgreens’ strongest
assets. The location of the drugstores adds to the strength of this resource. Walgreens
strategically places their stores at locations convenient to their customers like a busy intersection.
Location Type
Drugstores
Worksite Health and Wellness Centers
2011
7,761
355
2010
7,562
367
2009
6,997
377
Page |3
Infusion and Respiratory Services Facilities
Specialty Pharmacies
Mail Service Facility
83
9
2
101
14
2
105
15
2
Total
8,210
8,046
7,496
Number of Locations
Walgreens’s Take Care clinics are conveniently located at drugstores, hospitals, medical
centers and employer worksites. Walgreens has locations in every region of the US. Their
nationwide presence builds brand recognition throughout the country and helps cement brand
loyalty among customers.
Financial Resources
Walgreens’ strong financial position is a significant resource. With 37th consecutive years
of record sales, they have the financial strength and flexibility to pursue the current strategy and
modify the direction of the company when needed. Walgreens also has the available capital to
add and/ or update their locations to keep up with consumer demands. Furthermore, their strong
balance sheet allows them to recruit and maintain superior talent to run their organization.
2011 was a strong financial year for Walgreens. Disciplined focus on the core business
strategy resulted in new records sales of $72.2 billion in fiscal 2011 with a gross profit of $20.5
billion and earnings per diluted share of $2.94. Prescription sales increased 6.3% in 2011.
Page |4
Walgreens Strategy – Current Direction
Walgreens broad strategy is to advance the role community pharmacies play in the
healthcare of Americans. By expanding the scope of their “convenience-based healthcare
services”, Walgreens is attempting to transform their role from a traditional retail “drugstore”
into a one-stop shop for “health and daily living”. In enacting this change, Walgreens hopes to
leave their direct competition (i.e. CVS and Rite-Aid) behind to compete with one another in the
old drugstore format. Walgreens has named the theme of this revolution, the Walgreens “Well
Experience”. To achieve this transformation, Walgreens has adopted three key strategic
objectives:
1) Extend deeper into “healthcare provider” space by leveraging the capabilities of medical staff
2) Increase the footprint and impact of Take Care Clinics across the US
3) Upgrade information technology to improve the customer experience and build loyalty
Leveraging the Medical Staff
Walgreens first introduced the “Well Experience” theme in 2011 and rolled out a new
store format. The new design moves the pharmacy, which was traditionally located in the back of
the store, to front and center of the store and gives it a more “open” feel. The goal is to enhance
patient-pharmacist interaction and encourage face-to-face conversation by moving these
professionals out from behind the counter. Walgreens plans to invest in credentialing pharmacist
in disease management, provide training in patient consultation and require that their pharmacists
are certified immunizers. Creating the “Well Experience” also expands store inventory to include
fresh, healthy foods. By creating the “Well Experience”, Walgreens hopes to grow its retail
Page |5
pharmacy business, improve health, prevent hospitalizations and save money for patients,
employers, insurers and the health care system as a whole.
Expanding Take Care Clinics
The second key strategic initiative of Walgreens is growing the footprint of their Take Care
Clinic chain. The goal of the Take Care Clinic is to provide “personalized, quality healthcare,
made-easy”. The clinics are designed to prevent patients from making expensive emergency
room visits when their traditional physician’s office is closed or when they don’t have one. By
increasing the number of Take Care Clinics in its 7,900 US drugstores would play to one of
Walgreens greatest strengths as nearly two-thirds of the population of the USA lives within three
miles of a Walgreens store.
Advancements in Information Technology
The third key strategy of Walgreens is the advancement of their information technology.
The company’s most recent series of upgrades have really defined their aggressiveness in this
category. In strengthening their multi-channel strategy through investments in e-commerce and
mobile technology, Walgreens will continue to build the customer experience and customer
loyalty.
As part of upgrading stores and creating the “Well Experience”, Walgreens is rolling out
a new point-of-sale system across the chain that will help to improve the speed of service and
reduce costs. The new system allows for the implementation of the new Balance Rewards
program aimed at building customer loyalty and is capable of reading two-dimensional barcodes
on mobile phones for coupon and special redemption, a feature very few retailers are currently
offering.
Page |6
Walgreens has also made major improvements to the company’s presence on the web.
Walgreens.com visitors can now chat with a pharmacists online, manage and refill prescriptions,
and have them delivered to their front door, free of charge. Through their acquisition of
Drugstore.com, Walgreens has added an e-commerce user base of three million customers and
website that offers 75,000 household, health, beauty, vision and skin care products. Walgreens is
making major steps toward online/offline integration with the company’s Web Pickup pilot
program. The Web Pickup service allows customers to go online, see a store’s inventory in real
time, order what they need and pick-up in person in less than an hour, usually without even
leaving their car.
Walgreens recently released an award-winning mobile app. Customers can order
prescriptions or regular good via their smartphone and have them delivered to their home,
sometimes free of charge. Nearly half of all prescription refills done online are coming through
the mobile channel. The company has also invested in a separate app to assist with in-store
navigation and creating a shopping checklist.
Walgreens Strategy – Moving Forward
The US Healthcare Industry is changing. Walgreens has a unique and timely opportunity to
become a key player in the new regulations and processes that are soon to change the industry.
Our strategic suggestions focus on Affordable Care Organizations, in-hospital consulting and
PBM partnership or aquisition.
Affordable Care Act (ACA)
Health care costs in the United States are quickly becoming unsustainable, having doubled in the
last decade. In fact, total spending approached $2.6 trillion in 2010 alone, accounting for 17.9%
Page |7
of the nation’s Gross Domestic Product (Nussbaum). The lack of coordination of care for
patients with multiple chronic conditions often results in incomplete care, duplicate care, and an
increased risk of suffering medical errors.
In March of 2010, President Obama signed the Affordable Care Act (ACA). The ACA includes a
number of policies to help physicians, hospitals, pharmacists, and other caregivers improve the
safety and quality of patient care and make health care more affordable. By focusing on the
needs of patients and linking payments to outcomes, these delivery system reforms will help
improve the health of individuals and communities and slow cost growth. (CMS.gov. (2012)
With the introduction of the Affordable Care Act, there is a huge opportunity for Walgreens to
become the market leader, and in more ways than one. In addition to the growing population and
the aging Baby-Boomers, the Affordable Care Act is expected to create tens of millions of new
patients needing health care across the country. This will create a greater need for the services of
Walgreens pharmacists, nurse practitioners, and physician’s assistants. By focusing on forging
strategic partnerships with two specific types of organizations - Affordable Care Organizations
(ACOs) and Pharmacy Benefit Managers (PBMs) – and by further engraining themselves in the
in-patient consultation process, Walgreens can continue to grow and ensure success over the
long-term.
Partnerships with Affordable Care Organizations:
Healthcare is in a state of rapid and complete transformation. With implementation of the
Affordable Care Act (ACA), there are several distinct opportunities for healthcare providers and
healthcare companies to make strategic changes that will likely yield significant financial
returns. One significant change resulting from the ACA is the change in payment structure from
Page |8
fee-for-service to outcomes-based reimbursement (HealthCare.gov, 2012). This means that
healthcare providers will no longer be reimbursed on the imaging, labs, testing, and consultations
they provide; rather, they will be reimbursed on the actual outcome of the patient. This is a
change that will demand collaboration among healthcare providers and patient follow-up that
until now has not been a focus.
As a result of the change in reimbursement structure healthcare providers have started
forming Accountable Care Organizations (ACO’s). ACO’s typically consist of a group of
hospital-affiliated practitioners across specialty areas. These groups take responsibility for
patient outcomes and as a result must collaborate in order to assure positive outcomes for their
patients. Providers within an ACO must have channels for effective communication in order for
providers to communicate the current plan of care for the patient and establish follow-up
measures (HealthCare.gov, 2012). The pioneers in ACO formation have not found an efficient
way to manage patient’s medication therapy. Management of medication includes reconciliation
of inpatient and outpatient medications as patients are discharged from the hospital as well as
following-up with patients to assure that prescriptions have been filled and are being taken as
directed (Diagle, 2012).
Walgreens is in a position to address medication therapy management of patients in an
ACO environment. The company could position itself as the provider responsible for
reconciliation, dispensing, education, and follow-up in terms of medication management for
these patients. This initiative would require the company to hire additional staff and likely
utilize current staff members in different ways; however the benefit would be substantial.
Page |9
Patients receiving medication reconciliation, education and follow-up from a Walgreens
pharmacist will likely have better outcomes compared to patients who do not have the services
available to them (Diagle, 2012). These services will be desired by ACO’s as they are
reimbursed based on outcomes. Walgreens will pitch these benefits to currently functioning
ACO’s as well as ACO’s currently in formation. The company will require participating ACO’s
to e-prescribe all patient prescriptions to Walgreens, where the patient will then pick-up the
medications and receive consultation. The patient’s Walgreens pharmacist will be responsible
for following-up with patients within one week to inquire about proper adherence to medication
regimen as well as document any reported side effects, adverse effects, or allergies. The
Walgreens pharmacist will document this interaction in the patient’s chart, which is visible by all
other practitioners participating in the ACO. The Walgreen’s pharmacist will also be responsible
for following-up with patients if refills are not picked-up, this follow-up will also be documented
in the patient’s chart.
Walgreens would recognize an increase in prescription volume as well as increased
revenue from medication therapy management services, as they are able to bill insurance
companies for this service. This initiative would also allow for an ACO to function as a
complete collaboration among healthcare providers, which is an overarching goal of ACO
formation. Overall, this initiative would be advantageous for ACO’s and Walgreens.
In-Patient Transitions and Outpatient Pharmacies
Preventable hospital readmissions cost the healthcare system and estimated $25 billion annually
(O’Reilly, 2011). As part of the Affordable Care Act, Medicare penalties will be enforced
against hospitals that discharge patients and then readmit them within 30 days at too frequent of
a rate. These hospitals are already looking at up to $280 million in penalties as a result (Harry,
P a g e | 10
2012). Walgreens has the opportunity to position themselves as an in-hospital partner to ensure
discharge transitions are effective. In doing so, they establish themselves as the patient’s trusted
partner for post-hospital care as well as a valuable financial partner for the hospital system. This
can be accomplished with two strategic initiatives: WellTransitions and outpatient pharmacies.
Well Transitions
In October, Walgreen’s announced the WellTransitions program, an initiative designed to reduce
readmissions by using pharmacists to coordinate patient care during admission and discharge.
Walgreen’s associates will be on hand at hospitals to provide up to date patient to hospital staff
when a patient is admitted. When the patient is discharged, the pharmacist is there during the
consultation to ensure that the transition is smooth and to answer patient questions. This takes the
burden of medicine reconciliation off of the patient and the medical staff. They also provide
bedside medication distribution and direct follow up with the patients 9 days and 25 days after
discharge. Medication refill data and patient updates can be shared with primary care physicians
seamlessly (Fellow, 2012)
There are currently 12 hospitals participating in the program and all are reporting
significant reductions to their readmission rates. The cost for the program and resources are
covered by the reduction of fees and penalties through healthcare reform. Patients are also
satisfied with the program and they are more likely to participate because they recognize the
brand as one they trust. Expansion of this program will be beneficial to the future of Walgreens.
It engrains them in the healthcare process and expands their role as a trusted advisor. CVS
Caremark is partnering with a third party, DoveTail Health, to provide similar transition service.
As with everything between the competitors, if Walgreens doesn’t jump on this, CVS will.
P a g e | 11
Outpatient Pharmacies
Another initiative that warrants expansion is in-hospital pharmacy facilities. Currently
Walgreens operates 100-plus hospital pharmacy locations across the country. Patients can have
their prescriptions filled on-site before they are discharged. The prescription is them connected to
one of the 8,000-plus community pharmacies, enabling continuity in prescription management
from in-patient to out-patient treatment. The in-hospital location also allows the pharmacist to
work directly with medical staff to carry out custom prescriptions or complex treatment plans.
The pharmacists can work hand in hand with the hospital to reduce costs, reconcile and
align medications, ensure accurate first-fills and improve medication possession ratios – all of
which help reduce readmissions and potential financial penalties. A stronger connection between
inpatient and outpatient settings improves outcomes and reduces costs (Walgreens, 2011).
Pharmacy Benefit Manager Business:
Pharmacy Benefit Managers (PBMs) are middlemen between its customers – managed care
organization, insurers, government agencies, corporations, unions - and drug companies. PBMs
offer a number of services such as design and administration of the drug benefit coverage plan,
negotiate drug pricing and other terms with participating drug stores, buy drugs directly from the
drug manufacturers and distribute them by mail order, and prescription management.
Stand-alone retail drug stores and PBMs are being forced to fundamentally change their
business models due to a reduction in the number of blockbuster drugs, shorter product lifecycles
and design cycles, low barriers to entry and reproduction of efficient distribution systems by the
competitors. Many of these companies are losing their strategic competitive advantage and are
seeking the next big thing to rejuvenate their sales.
P a g e | 12
PBM business provides synergies to the retail drug store business. Customers can obtain
their medications from either a retail pharmacy or a mail-order pharmacy. This model provides
customers a choice for pharmacy channel – retail or mail.
CVS Caremark has achieved a greater share of prescription revenues through integrated
offerings of PBM business and retail pharmacy. For qualifying participants, “Maintenance
Choice” program provides the option of filling their 90-day maintenance prescriptions by mail or
at one of the retail locations at the same co-pay and pricing as mail order, which is very difficult
for a standalone PBM or retail pharmacy to offer. More than 10 million members have adopted
Maintenance Choice program as of January 2012. (CVS Annual Report)
Year
Retail Pharmacy net
sales (in billions)
2011 $59.6
2010 $57.3
2009 $55.3
Net Retail Sales
through PBM (in
billions)
$11.3
$8.7
$7.7
% Retail Pharmacy
sales due to PBM
% Increase in retail
sales due to PBM
19%
15%
14%
4%
1%
CVS Caremark Retail Pharmacy Sales
As per CVS Caremark’s 2011 financial statement, PBM business has contributed 14%, 15% and
19% towards retail sales in for the years 2009, 2010 and 2011 respectively. Moreover, there is
steady year over year increase in the share of retail pharmacy sales due to PBM.
Walgreens sold its pharmacy benefit management business, Walgreens Health Initiatives,
Inc., to Catalyst Health Solutions, Inc. in 2011 and negotiated partnership with standalone PBMs
such as Medco and Express Scripts. Failure to renew contract with Express Scripts-Medco had
resulted in big loss of revenue for Walgreens. Prescription sales fell 9.9% in the quarter ended
May 31 2012, compared to a year earlier, and they slipped 3.9% year-over-year in the prior
P a g e | 13
quarter. Its earnings fell about $113 million over the course of those two quarters due to the
Express Scripts contract termination (CNN Money). In spite of Walgreens reaching a deal with
Express Scripts early in Q3 2012, CVS expects to retain at least 50% of the customers it gained
as a result of poaching customer through an aggressive discounts program (Seeking Alpha).
Express Scripts Holding (post Medco merger) and CVS Caremark controlled about 32% and
17% of the prescription-drug market share respectively in the first quarter of 2012, according to
Atlantic Information Services Inc., a health-care information company that tracks PBM market
share (Wall Street Journal). Express Scripts Holding is the nation's third-biggest pharmacy
operator, trailing only CVS Caremark and Walgreens.
Above analysis clearly indicates the effect of PBM business on retail drug stores and
resulting increase in share of prescription revenues from claims processed by PBM business.
With increase in number of insured population once Affordable Care Act (ACA) becomes fully
effective in 2014, PBMs will gain even more market share through their role in administrating
the expanded prescription drug plans. Given the risk of partnering with standalone PBMs such as
Express script, competitive threat due to consolidation of PBMs, future growth in PBM business
due to ACA and success of CVS Caremark merger, we would recommend Walgreens building
its own PBM business either ground up or through acquisition.
Strategic Uncertainties and Risks
P a g e | 14
Walgreens was built on a model of organic growth while maintaining solid financial stability.
The company has paid a high dividend to investors for almost 80 straight years. But now the
company is faced with an evolving pharmaceutical industry, intense competition, and few
prospects for expansion in the saturated US market. To continue to satisfy investors, Walgreens
needs to look elsewhere to find growth. In implementing their strategy for continued growth,
Walgreens will venture deeper into healthcare provider space, partnering with Accountable Care
Organizations and Pharmacy Benefit Managers to seek greater revenue and profitability as the
sweeping reforms of the Affordable Care Act are made the law of the land.
Why would Walgreens expose themselves to so much risk by moving further into the
volatile healthcare provider business despite its ambiguous future? One reason is that they
believe they can exploit these risks, take advantage of growth opportunities and generate value
for their shareholders. Unfortunately, it’s just not that simple. Substantial political and economic
uncertainty lie ahead for the healthcare industry as the new laws of the Affordable Care Act are
implemented. To be successful in their strategy of expansion, Walgreens must develop an acute
understanding of the major risks they face in this new territory and create real options to mitigate
these risks.
By moving upstream in the healthcare supply chain, partnering with ACOs and acquiring
its own PBM, Walgreen is taking on much greater risk than it faced in its previous position in the
marketplace. Taking on this risk can yield two results: positive consequences- higher excess
returns and sustained growth, or negative consequences- volatile earnings, a higher cost of
capital, and potential bankruptcy. Good risk-taking is like a call option. It allows you to expand
your exposure to upside risk (potential benefits), while limiting your downside risk (potential
losses). Of course, creating these ideal conditions is much easier said than done. It is inevitable
P a g e | 15
that Walgreens will meet unexpected challenges as it further embeds itself in the healthcare
business. By understanding the risks, preparing adequately and responding definitively when
conditions change and challenges appear, Walgreens will not only “survive the storm” but be
positioned to take advantage of future opportunities as they present themselves.
As Walgreens moves deeper into healthcare provider space partnering with ACOs, acquiring
a PBM, expanding the number of Take Care clinics, in-store and worksite wellness centers, and
on-site pharmacies, the company will need to understand, anticipate and minimize the risks
associated with:

Politics and the Changes in Healthcare Law (Affordable Care Act)

Increased Provision of Clinical and Pharmacy Services

Financial Uncertainties

Competition

Other General Uncertainties
Politics and the Changes in Healthcare Law
Our recommendations for Walgreen’s strategy for growth are contingent on the continued
implementation of Affordable Care Act. During the 2012 federal election cycle there were
numerous claims by the Republican presidential candidate, Mitt Romney, that if elected, he
would repeal the Affordable Care Act. Since Barack Obama was successfully re-elected on
November 6, 2012, Walgreens can be reasonably certain that Affordable Healthcare Act will
move forward without risk of being repealed. However, nothing is ever certain in politics and
the ACA has proven to be a very controversial law. As the healthcare reforms are enacted, it is
almost certain that an abundance of legal challenges be forthcoming from the law’s many
opponents.
P a g e | 16
Walgreen must keep a careful watch on any discussion of possible changes to the law and
adjust their strategy to align with the changes. This is especially true when planning for the
long-term. Although we are assuming that the ACA will move forward as scheduled on the
timeline ending in 2014, the future over the long-term is uncertain. There is the possibility that
the new system will fail or be wildly unpopular. There is also the possibility that the law will be
so successful that the government will dramatically increase healthcare benefits for American
citizens. What is certain is that the state of healthcare in the United States is changing rapidly
and Walgreen’s strategy must provide the flexibility to adapt to any possible alterations,
improvements or reductions in healthcare benefits.
Future laws and regulations will affect ACOs and PMBs either positively or negatively.
Since our strategy is to form partnerships with ACOs and acquire our own PBM, Walgreens
must be highly aware of any alterations and how they will affect the ACOs, PMBs and
healthcare in general. For instance, part of our strategy is to secure some of the funding
allocated to the ACO’s with whom we plan to partner. Walgreens must not put itself in the
position that they will take financial hit if funding is no longer available. Also, the PMB market
has always been carefully watched and regulated by federal and state government agencies. If
Walgreens successfully acquires a PBM of their own, they must make sure they follow all
government laws and regulations. Failure to do so will result in potential fines and costly legal
battles.
As previously mentioned, depending on the success of the ACA, the government may
significantly increase or decrease health care benefits it provides to the public. Walgreens must
be prepared to compensate for any losses it may incur as a result of these changes. For example,
if the federal government suddenly provides certain services or medications cost free to citizens,
P a g e | 17
Walgreens stands to lose significant revenue if they currently profit from them. On the flip side,
if funding is cut and certain benefits are dropped from the health care act, Walgreens must be
ready to provide those dropped benefits affordably and conveniently.
Increased Provision of Clinical Services
Partnering with ACOs and pushing the expansion of Take Care clinics, in-store and
worksite wellness centers, and on-site pharmacies could expose Walgreens to significant
strategic risk and finance risk. If strong partnerships with ACOs fail to materialize or regulations
are enacted that restrict the types of care that can be provided by the company’s nurse
practitioners and pharmacists, Walgreens could be left with empty and overstaffed clinics and
wellness centers. Essentially anytime an organization is subject to government regulations and
procedures, risk exposure is increased, as environmental changes can call for significant
adjustments to systems and operations.
Furthermore, by increasing the number of clinics and wellness centers, Walgreens will be
increasing its exposure and liability for medical malpractice cases. Through its partnerships with
ACOs, acquisition of a PBM, along with deploying more clinics and wellness centers, Walgreens
will be diagnosing and treating significantly more patients and dispensing more drugs than it did
in the past. This larger volume of patients not only increases the potential for revenue, it
increases Walgreen’s exposure to lawsuits resulting from misdiagnosis, mistreatment, or harmful
drug interactions. Walgreens will need to be vigilant in managing malpractice liability risk
through increased training and oversight and maintaining state-of-the-art patient and treatment
record keeping systems using the latest technology.
P a g e | 18
Financial Uncertainties
Implementing Walgreens strategies for growth in time to take advantage of the 2014
market surge ignited by the Affordable Care Act of 2010 will require significant funding. Cash
provided by operations is the principal source of funds for these capital expenditures (WAR).
There are several uncertainties, both internal and external, that could decrease the amount of cash
provided by operations. Any reduction in cash would make it very difficult for Walgreens to
implement our growth strategies.
Walgreens cash flows will be impacted most significantly by the performance of their
acquisitions and utilization of generic drugs to fill prescriptions. Over the past three years,
Walgreen's has spent $8.55 billion on four business acquisitions (WAR, W-news). The first two
acquisitions, totaling $1.40 billion, reported a net loss for 2011 and had decreasing cash flows
compared to 2010 figures (WAR). The third acquisition, a $6.7 billion investment ($4 billion in
cash and $2.7 billion in stock) for 45% ownership of the Alliance Boots pharmacy chain, also
reported decreasing cash flows for 2011 compared to 2010 (W-news). If these acquisitions
consume more cash than they generate, Walgreens risks not having the cash and resources
needed to implement our strategies to maximize the profitability of the enlarged healthcare and
pharmacy markets come 2014. In addition, it is also possible that Walgreens could generate less
cash from operations due to more conversions to generic prescription drugs (generic drugs
introduced to the market for the first time) over the next three years. Generic prescription drugs
“heavily impact sales and profit” and accounted for 74% of prescriptions filled by Walgreens in
2011 (WAR). If there are significantly more generic conversions over the next three years, sales
will decrease (albeit profit margins will increase) as generic drugs are cheaper than their brand
name counterparts.
P a g e | 19
Competition
The retail prescription drug market is extremely competitive. In order to extract
maximum value from their growth strategies, Walgreens needs to anticipate the moves of their
competition and stay a step ahead. Two competitors in particular, the retail drugstore CVS and
the Express Scripts PBM, comprise the most risk to the success of Walgreen's strategy.
As the market leader in the retail drugstore sector, CVS poses the largest threat to Walgreens
growth as the company generates larger earnings and more cash flow from operations. Unlike
Walgreens, CVS has not invested heavily in business acquisitions. This has resulted in more
resources and free cash to invest elsewhere. CVS operates nearly 200 more in-store wellness
clinics than Walgreens (AMA). This provides CVS with a significant advantage as they will be
in position to capture a higher percentage of the new market expansion. Right from the start,
CVS has the ability to serve more customers at in-store clinics and can focus more resources on
expansion. Furthermore, as a result of the contract dispute between Walgreens and Express
Scripts in 2011, a large percentage of Express Script clients stopped using Walgreens pharmacy
services because they could not get their prescriptions filled. A significant number of those who
left took their business to CVS. Even though the dispute between Walgreen's and Express
Scripts has been resolved, CVS estimates that they will retain 60% of the customers that left
Walgreens (CC). Although projections vary on the exact amount of customers who left
Walgreens for CVS, this is worrisome for Walgreens because before the dispute Express Script
customers represented $5.3 billion of Walgreen's $72.2 billion sales or 7.34% (WAR).
Express Scripts also poses a threat to Walgreen's hopes for growth. Besides offering their
customers the option of filling prescriptions through retailers like Walgreens, CVS, and others,
Express Scripts encourages customers to fill their prescriptions directly through Express Scripts
P a g e | 20
via mail order. Express Scripts recently merged with Medco to form the largest mail order
prescription business in the US. If Express Scripts continues to not only grow their market share
but grow the percentage of their customers that exclusively use the mail order service, they will
steal significant business from Walgreens and leave them with less resources available to take
advantage of the larger market in 2014. Also not helping this situation is Walgreen's strained
relationship with Express Scripts in the wake of the aforementioned contract dispute.
Other General Uncertainties
In addition to the specific risks identified above, Walgreens also faces general business
risks such as the overall economic environment and consumer sentiment. Changes in the global
economic climate such as prolonged recessions in the US or Europe could adversely affect the
healthcare industry’s financial strength, the government’s health care initiatives, and consumer
buying habits. All of these would affect Walgreens potential for revenue and profitability.
Because Walgreens has a large and diverse customer base (not a single customer accounts for
more than 10% of revenue), the company’s general business risk is relatively spread out.
Although competition in the retail drug industry is escalating from all angles (websites, mail
orders, grocery and discount stores), Walgreen’s solid reputation, brand recognition, and
multiple channels for reaching customers position the company to remain an industry leader.
In recent years, Walgreens has begun taking a more proactive approach to risk
management in preparation for their next phase of growth. The company recently installed their
first Chief Risk Officer (CRO) and began tracking specific performance measures as leading
indicators of increasing risk. The healthcare reforms brought on by the ACA will without a doubt
significantly impact the environment in which Walgreens operates. As the company moves
forward implementing their strategies, partnering with ACOs and acquiring a PBM to increase
P a g e | 21
service and prescription sales, they must focus on creating the real options that allow them to
limit exposure to downside risk and increase upside risk, generate greater revenues, profitability
and growth.
Conclusion
Throughout this in-depth analysis of Walgreens’ strategy, one thing remains clear: they are on
the right path. They are financially solid, have a strong brand with increasing reputational capital
and their business is evolving with the help of technology. They are expanding internationally to
keep up with the global market. Most importantly, they are in tune with their industry, their
markets and their consumers. By continuing to forge strong partnerships, adapting to the
changing environment, and managing risks and uncertainties, Walgreens is poised to continue
their success for years to come.
P a g e | 22
Works Cited
Walgreens. (2011). Walgreens Annual Report.
CVS. (2011). CVS Annual Report.
Nussbaum, Alex. (2012, May 20). Health-Care Costs Rise Faster Than U.S. Inflation Rate.
Retrieved from: http://www.bloomberg.com/news/2012-05-21/health-care-costs-rise-faster-thanu-s-inflation-rate.html
CMS.gov. (2012, May 1). Retrieved from: https://www.cms.gov/Regulations-and
Guidance/Legislation/EHRIncentivePrograms/index.html?redirect=/EHRIncentivePrograms/
HealthCare.gov. (2012, March 12). Accountable Care Organizations: Improving Care
Coordination for People with Medicare. Retrieved from:
http://www.healthcare.gov/news/factsheets/2011/03/accountablecare03312011a.html.
Johnsen, M. (2012). Drug Store News. Retrieved Oct 4, 2012, from dsn.com:
www.drugstorenews.com/print/466196
Useem, J. (2001, Feb 19). Most Admired: Conquering Vertical Limits. Fortune , pp. 84-96.
PBM 101 by Mike Medel with Pharmaceutical Strategies Group
Walgreens Newsroom Article 1: http://news.walgreens.com/article_display.cfm?article_id=1046
Walgreens Newsroom Article 2: http://news.walgreens.com/article_display.cfm?article_id=5537
Drug Store News Article: http://www.drugstorenews.com/article/walgreens-outlines-five-keystrategies-change-pharmacy-retail-industry
Ernst & Young Article: http://www.ey.com/GL/en/Industries/Life-Sciences/Walgreens-strategictransformation
Diagle, Lisa. “Pharmacists’ Role in Accountable Care Organizations.” Jan. 2011. Web. 20
Oct. 2012. <http://www.ashp.org/doclibrary/advocacy/policyalert/aco-policyanalysis.aspx.>.
CNN Money- http://money.cnn.com/2012/07/19/investing/walgreens-express-scripts/index.htm
P a g e | 23
Seeking Alpha –
http://seekingalpha.com/article/979061-watch-for-walgreen-express-scripts-impact-in-cvscaremark-earnings
Wall Street Journal http://online.wsj.com/article/SB10001424052702303816504577319372702722002.html
AMA: “CVS retail chain clinics expand while Walgreens operation stalls” by Pamela Lewis
Dolan, 1/23/2012, American Medical Association
CC: “CVS bullish after snatching some of Walgreen’s customers” by Zoe Galland, 11/6/2012,
Crain’s Chicago Business