Is It A Good Time To Buy Walgreen?

| About: Walgreens Boots (WBA)

This article focuses on the expected long-term changes in the stock price of Walgreen Company (WAG) as a result of recent and prospective changes in the health and medical industry. I will also highlight WAG's efforts to handle upcoming challenges posed by other industry players.

Company Performance

Walgreen is the largest drugstore chain in the US with 8,116 stores spread across the 50 states of the United States of America, the District of Columbia, and Puerto Rico as of October 2013. The company opened a net of 202 new stores last year to further expand its operations. Walgreen sells a number of products segregated into three major segments, each of which is shown below as a percentage of the total revenues of the company.

Source: Annual Report, 2013

Recent financial data of the company paints a rosy picture with the sales figure reaching a record high of $18.3 billion marking a profit margin of 68%. When compared to the same quarter last year, the sales figure indicates a growth rate of 6%. Moreover, the market share of the company has risen by a meagre 50 bps to 19.4% in the retail prescriptions market. Since prescription drugs have a heavy contribution to the total sales of the company, this slight increase in the market share will have a significant impact on the top line of the company. During the most recent quarter ended, prescription drug sales showed a growth of 7.3% compared to the previous quarter, superseding the industry by 2.9%.

Overall, total pharmacy sales of the company rose by 10.2%, which translates into a significant increase in the profit margins of the company since pharmacy sales are a major contributor to the total revenues of the company.

Comparable-store traffic declined by 1.3% during the first quarter of 2014 even though comparable-store sales showed a growth rate of 6.1%. In this regard, the company has partnered with Theranos to counter the declining number of customer visits.

Industry Outlook

The US healthcare industry is undergoing a significant change. A number of patents have expired during 2013 and this has made the entry of generic drug distributors quite easy. Moreover, the recent enforcement of the Affordable Care Act "ACA" has further complicated the business environment for existing players who will now have to fight new competition while struggling to bring their operations in compliance with the new law. Increasing competition, requirement to comply with the law, and declining opportunities for further growth within the US has made the overall business environment tense and complex in the country. With these facts in mind, the growth of the pharmaceutical industry in US is expected to hover around a rate of 1-2%.

The global growth rate in medical spending is anticipated to be around 3% per annum, translated into a dollar amount of $1 trillion in 2014 and is expected to reach $1.2 trillion by 2017. The contribution by the US to global medical spending is expected to decline from 34% in 2012 to 31% in 2017 even though market shares are not expected to budge from current levels in the near future. Growth in medical spending will mainly be driven by the emerging markets with only 16% of the growth attributed to the US. These results are indicated in the pie charts below.

Source: IMS Institute

Collaboration with CDC

Recently, the company announced that it is collaborating with the Centres for Disease Control and Prevention (NASDAQ:CDC) to cater to the existing and growing number of HIV infected patients. Presently, there are about 1.1 million people in the US who are reportedly infected with HIV and this number is growing rapidly. The following graph shows the newly identified cases of HIV as of 2010.

Source: Centres for Disease Control and Prevention (CDC)

With that in mind, Walgreen started to collaborate with the CDC to provide a patient-centered facility to customers. The success of this facility is apparent from the survey results showing that 15,000 patients received treatment from Walgreen were more regular in taking their medication compared to those who received treatment from traditional facilities. To be precise, 74% of the patients who received medication from one of Walgreen's HIV specialized pharmacies were adherent to their medication whereas only 69% of patients regularly took their medication from traditional facilities for treatment.

Theranos-Walgreen Partnership

Theranos has developed a new and improved testing facility that draws just smaller blood sample of 1/1000th of a typical sample of blood for testing. The company recently announced a partnership with Walgreen which will allow Theranos to establish a lab testing service within the Walgreen pharmacy. This will hugely benefit both companies. Theranos will make use of Walgreen's pharmacy network across the US, and Walgreen will benefit from the increased number of patient visits to its pharmacies.

Potential Threats

Walgreen's current market share is under a considerable threat as CVS Caremark is aggressively expanding its network across the US. Walgreen is already under pressure to increase customer visits at its drugstores even when there is no significant competition in the market. With another player in the market, Walgreen will be forced to fight for the customers more aggressively. This will directly hit the top and bottom line of the company in future if the company does not deal with the coming competition efficiently and effectively.


Walgreen will benefit from its collaboration with the CDC by enhancing its revenues and profit margins in the HIV customer group. The rising number of HIV patients will translate into the revenue base of the company as the company already has a widespread network across the US. Moreover, the partnership with Theranos is expected to boost the number of customer visits to the company's pharmacies. Rising profit margins and growing popularity among customers has had a positive impact on the price of the stock. The company's growing operations will increase its stock price thus making it a good candidate for investment.

If Walgreen does not make a timely move with regard to the potential competition by CVS, the stock of the company will eventually be pushed downward. The company is a good candidate for investment presently; however, long-term impact on the price is unknown as of now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.