Walgreens Executives Lift Loss Estimates for Healthcare Group

June 27, 2023
A traffic shortfall at its clinic network and more acquisition integration work ahead have pushed out the company’s timeline for positive adjusted EBITDA

Walgreens Boots Alliance Inc.’s healthcare services businesses—now generating revenues at an annual rate of $8 billion—will take far larger losses this year than previously expected, CEO Roz Brewer said June 27 after the Illinois-based company posted disappointing results in its fiscal third quarter.

In part because of the delay in the healthcare group’s journey to profitability, Brewer and her team have added $600 million to its goal of cutting costs by $3.5 billion between now and late summer 2024 and looking to sell off more divisions no longer considered core to its long-term goals. Now on that list is the company’s pharmacy chain in Chile, which is on track to be sold by year’s end.

Specific to the healthcare group, the executives now also plan to cut more costs from the Summit Health-CityMD clinics it acquired (with help from Cigna Corp) at the beginning of this year: Rather than $150 million in synergies by calendar year 2027, they now are targeting $200 million by the end of 2026.

But the rapid scaling of Walgreens’ value-based care services business—fiscal Q3 revenues were nearly $2 billion and pro forma top-line growth clocked in at 22%—will produce larger losses than previously forecast. For the full fiscal year, the division is now expected to post an adjusted EBITDA loss of between $340 million and $380 million, up significantly from the roughly breakeven performance Brewer and CFO James Kehoe were forecasting in January after completing the Summit Health-CityMD acquisition.

Investments in new VillageMD clinics (nearly half of co-located sites are less than a year old) continue to require capital but a drop in respiratory-related visits during the quarter also have set back profit projections. On top of that, some acquisitions that Summit Health had made prior to itself being bought are taking longer to integrate.

“Rapid correction actions are underway,” Kehoe said. “We expect to drive sequential adjusted EBITDA improvement in the fourth quarter and beyond.”

On a conference call with analysts, President of U.S. Healthcare John Driscoll said the cost-cutting measures—among them a pullback in clinic openings to focus on growing more profitable clusters—and work to bring in more patients should generate a 70 percent improvement in EBITDA this quarter versus the spring.

The leaders of Walgreens early this year had set a goal of $1 billion in adjusted EBITDA from healthcare (which include home care, specialty pharmacy and clinical trials businesses in addition to urgent and specialty care clinics) by the fall of 2025. On their conference call, they didn’t specifically address that longer-term target—details on that will likely come in three months—but Driscoll did say his team is encouraged by the potential of the work being done and will continue to “dig in there” to produce steady improvements over time. Kehoe added that the traffic and integration setbacks have essentially set Walgreens back between six and 12 months from the targets leaders laid out late last year.

Also hurting Walgreens’ fiscal Q3 numbers—a net profit of $118 million on $34.5 billion in sales—were a steeper-than-expected drop in sales from COVID-19 vaccines—Brewer and her team had considered that source of revenue “a wild card” but it came in short of forecasts—and more cautious retail spending patterns from many consumers amid broader economic uncertainty. Brewer said the Walgreens team is “closely watching these emerging challenges” and expects they will persist several quarters.

Shares of Walgreens (Ticker: WBA) were down nearly 10% to about $28.75 in midday trading June 27 after the earnings report and call. Year to date, they have now lost more than 20% of their value, which has trimmed the company’s market capitalization to about $24.6 billion.