The pessimism over Walgreens Boots Alliance (WBA) guidance and commentary on the pharmacy industry is proving contagious.
Shares of Walgreens slid double digits on Tuesday morning, implying the fifth biggest one-day percentage loss for the stock since it began trading publicly.
"A number of the trends we had been expecting and preparing for impacted us significantly more quickly than we had anticipated. We found ourselves facing a combination of increased reimbursement pressure in the quarter, lower generic deflation, lower brand inflation and lower-than-anticipated benefits from our work to refresh and renew our retail offering, primarily in the U.S.," CEO Stafano Pessina told analysts on Tuesday morning. "Of course, the pharmacy trends are not only impacting our business. They are impacting the overall market, and we likely continue this over the coming months."
The comments indicating weakness in the overall market and pharmacy industry is reverberating across its competitors.
CVS Health (CVS) is sagging, having fallen about 3% in morning hours and Ride Aid (RAD) fell about 7% to an all-time low, while even more diversified pharmacy firms like Kroger (KR) and Walmart (WMT) marked small declines.
"The pharmacy market is very challenging right now and we're seeing similar trends to our competitors," Walgreens CFO James Kehoe commented, deflecting fault. "Reimbursement pressure has continued and opportunities for mitigation are lower than we expected. The combination of this reimbursement pressure, lower levels of generic deflation and lower brand inflation resulted in pharmacy margins that were worse than planned and 280 basis points below the same period last year."
A report from the U.S. Commerce Department adds to the concern as it indicated healthcare purchases were actually up year over year. The logical conclusion from the poor reports from CVS, Walgreens, and Rite Aid is that sales were not scooped up by a traditional brick and mortar retailer like Walgreens.
With the emergence of Amazon's (AMZN) PillPack and the online pharmacy delivery platform Capsule, the secular trends are certainly worth keeping sight of.
According to Grand View Research, the ePharmacy business is only set to accelerate and could stand to further weaken results even beyond Walgreens' 2020 turnaround timeline.
"Increased internet penetration across the world, improved healthcare infrastructure, rapid aging of the population, and increasing awareness pertaining to e-commerce amongst users are some of the factors propelling growth," a research paper states. "Shift in consumer behavior with an increased demand for convenience is also one of the key factors contributing to the market growth. Furthermore, rising adoption of e-commerce and digital technologies in healthcare sector is expected to propel growth."
Clearly, the company's with the most nimble online presence will do best, and Walgreens 10,000 locations could prove to be more a burden in this context than a catalyst.
To be sure, Pessina did not the company is making efforts to build out its online presence as a chief priority having only recently added a Chief Digital Officer and inked a partnership with Microsoft (MSFT) .
"We are on track on digitalization. The Microsoft teams are onboarded, they're physically present in our offices and we have moved quickly to consolidate our internal digital teams to create a single team under an experienced Chief Digital Officer," COO Andrew Gourlay told analysts. "The work we are doing on digitalization of our business will deliver an enhanced customer insurance and the tools and analytics to drive customer loyalty. This builds on our existing highly-successful, customer-facing platforms including our five star-rated 55 million download App under 85 million active balanced reward members."
Still, the company's capital expenditures are slated to decreases on the digital front.
"We see opportunity to reduce our annual IT cash spend by $500 million to $600 million, almost equally split between OpEx and CapEx," Kehoe commented. "This represents a reduction of approximately 25% to 30% versus the baseline cost, so it is a significant opportunity. In the short-term, we plan to selectively invest part of the savings to build-out new customer digital propositions; however, we will expect each project to drive incremental value and benefits, thus creating a virtuous cycle."
While the commentary is optimistic, the slash in spending amid the secular shifts in the market are quizzical unless partnerships can push the company's presence more effectively.
While it might not be the only company affected by the secular shift to online pharmacies, it breaks with a company like CVS in terms of strategy. CVS is actually increasing digital investment spend in 2019 to fuel a turnaround across the healthcare and pharmacy businesses.
"We're continuing to invest in and expand our investment is digital, and improving the digital and mobile experience for members and customers across all of our businesses, and we're making investments in our Health Cloud software platform," CFO Eva Boratto said in February.
As 2019 progresses and 2020 turnaround plans come into view for many of the stocks in the sector, this secular trend will be one to keep an eye on.
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