Population Health Management

Walgreens Hits Healthcare Service Milestone – and Takes $5.8B Charge on Village Investment

March 28, 2024

The primary care clinic chain is close to wrapping up an initiative to close 160 locations, or nearly a quarter of its network.

Geert De Lombaerde

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One step forward, one step back?

The leaders of Walgreens Boots Alliance Inc. on March 28 said the company’s U.S. healthcare services unit grew its pro forma sales 14 percent in the three months ended Feb. 29 and produced its first-ever quarter of positive adjusted EBITDA.

But they also announced that they’ve booked a $5.8 billion charge against profits because the financial performance of VillageMD, a key pillar of that healthcare portfolio, is now expected to be worse than before and because its peer clinic operators are being valued at lower multiples.

Walgreens invested more than $6 billion in VillageMD via two deals in 2021 and 2022 and last year put to work another $3.5 billion when VillageMD acquired Summit Health-CityMD. The company now owns 53 percent of VillageMD, which rang up revenues of $1.6 billion in Walgreens’ second fiscal quarter—a 20 percent pro forma jump from the prior-year period.

The Village leadership team has been closing clusters of its clinics and making other cost cuts in recent months to focus on a smaller number of cities where it has dense store networks. Last fall, the venture set out to close 60 of its 680 locations but in January raised that number to 160. About 140 of those closures have been completed already.

“This goodwill write-off is noncash, and we do not believe it will have a significant impact on our financial position or our ability to invest across businesses going forward,” CFO Manmohan Mahajan told analysts on a conference call discussing Walgreens’ fiscal Q2 numbers. “We have seen positive financial impacts from the recent actions taken by VillageMD management […] We believe the focused approach on improving performance in core markets as well as rightsizing the cost structure will provide VillageMD a platform for future growth.”

The massive Village impairment charge overshadowed the adjusted profitability milestone of Walgreens’ healthcare group as a whole. The division, which also includes the Shields specialty pharmacy business and homecare business CareCentrix, produced adjusted EBITDA of $17 million last quarter, an improvement of $127 million from the same period last year, on total sales that grew by a third to nearly $2.2 billion. The group narrowed its adjusted operating loss to $34 million from a loss of $160 million a year earlier.

CEO Tim Wentworth and his team are sticking to their full-year goal to have Walgreens’ healthcare group break even on an adjusted EBITDA basis. That’s as new division president Mary Langowski goes through a review of the various ventures under her umbrella to ask, as Wentworth said on the conference call, “is it staffed right, is it built for growth, does the market support growth.”

The Walgreens leadership team is running a similar review of all the company’s businesses, which includes its flagship U.S. pharmacies and retail stories and the Boots chain in the United Kingdom.

“We have about a half a dozen things that need to either fit, they need to synergize, they need to offer upside in a long-term runway for growth either by themselves or perhaps combined with other things,” Wentworth said. “They need to unlock capabilities that we would otherwise not be able to have unlocked or else we need find a better place for them.”

Shares of Walgreens (Ticker: WBA) rose roughly 3 percent on the company’s Q2 report and were changing hands around $21.70 in afternoon trading March 28. They’re up slightly over the past six months, growing the company’s market capitalization to nearly $19 billion.