Walgreens sells Cencora shares, mulls selling VillageMD, while CVS plans to trim costs by $2 billion
Walgreens Boots Alliance and CVS Health are feeling the effects of changing consumer trends, shrinking reimbursement rates, and competition from Amazon, Walmart, and, in rural areas, Dollar General.
Both retail pharmacy chains have closed hundreds of stores in recent years and have implemented other measures to strengthen their financial performance. Both have invested billions in primary care offerings, and now Walgreens may be looking to cut its losses with regard to VillageMD.
CVS Health has been able to rely on its Aetna subsidiary to offset increasing expenses in other business segments, but the decreasing profitability of Medicare Advantage plans is changing that.
Here’s what has taken place with both companies just since the start of the month:
Walgreens announced that it had sold all of its remaining unencumbered shares of drug distributor Cencora (formerly AmerisourceBergen) common stock for proceeds of approximately $1.1 billion.
Walgreens has been gradually selling its stake in Cencora over the past year. This latest sale reduces Walgreens’ ownership in Cencora from roughly 12% to about 10%.
The proceeds will be used primarily to pay down debt and for general corporate purposes, Walgreens said, noting that the sale would not have an impact on the company’s long-term partnership with Cencora; their partnership goes back to 2013.
More recently, Walgreens has signaled that it may also sell its stake in the primary care chain VillageMD. During the company’s third-quarter earnings call in late June, CEO Tim Wentworth said Walgreens would reduce its 53% stake in VillageMD, though at the time he said Walgreens intended “to remain an investor and partner.”
But in a filing with the Securities and Exchange Commission, Walgreens stated that it is evaluating a variety of options with respect to VillageMD, in light of Walgreens’ ongoing investments in VillageMD’s businesses and VillageMD’s “substantial ongoing and expected future cash requirements.”
Those options “could include a sale of all or part of the VillageMD businesses, possible restructuring options, and other strategic opportunities,” according to the filing.
In the SEC filing, Walgreens also stated that it had entered into a forbearance agreement with VillageMD on Aug. 6 after VillageMD defaulted on $2.25 billion in secured loan facilities Walgreens provided in January 2023.
Walgreens took a $5.8 billion write-down on its VillageMD investment earlier this year and has closed between 140 and 160 VillageMD locations since the start of the year. The company also plans to close an unspecified number of its own stores that are deemed to be underperforming.
Walgreens’ share price fell sharply when the company released its quarterly earnings in late June, from $15.66 to $12.19. On Friday, the company’s share price hit a year-to-date low of $10.68.
Meanwhile, CVS Health released its second-quarter financials last week, lowering its earnings expectations for the second time this year.
Citing disappointment with the performance of the health care benefits segment (which includes Aetna) and its outlook, CEO Karen Lynch said during the earnings call that Brian Kane, who joined CVS Health in April 2023 and had served as president of Aetna since last September, was no longer with the company.
Adjusted operating income for CVS’ health care benefits segment dropped to $938 million for the second quarter, a 39% decrease from the $1.5 billion reported for the same period a year ago.
Going forward, Lynch will directly lead CVS’ health care benefits segment. She was Aetna’s president from 2015 until she became CEO of CVS Health in 2021. Tom Cowhey, CVS Health’s chief financial officer, will assist Lynch in overseeing the segment’s day-to-day management.
During the call, Cowhey said costs associated with Medicare Advantage health plans could increase in the second half of this year, noting elevated trends in the second quarter in inpatient care, supplemental benefits such as dental, and pharmacy. He said there was “evidence of an acceleration of trends” in those categories after the quarter closed.
Lynch revealed on the call that CVS will attempt to cut $2 billion in costs over the next few years. This is in addition to an initiative announced last year to trim costs by as much as $800 million.
The new cost-cutting efforts include further streamlining and optimizing the company’s operations and processes and accelerating the use of artificial intelligence and automation, Lynch said.
In a note to investors, Charles Rhyee, an analyst with TD Cowen, said the changes CVS is making suggest that the company “is finally realizing (a bit late) that it needs to make more significant changes to turn around performance.”
While Walgreens has been closing many VillageMD locations, CVS has been opening new Oak Street Health clinics. So far this year, CVS has opened eight dual-branded clinics in CVS stores, and there are plans to open 18 more by the end of the year, Supermarket News reported, citing a CVS spokesperson.
Our Take: Trying to make primary care and urgent care more accessible and more affordable is a commendable goal. Trying to do so while making a profit is a challenge, as Walmart, Amazon — and Walgreens and CVS — have found.
Over the last few decades, Walgreens and CVS created vast networks of stores. For a while, it seemed as though one or the other was preparing to open a new nearby location no matter where you lived. It made sense to begin offering very basic health care services in the stores.
For years, both pharmacy chains gradually worked at ramping up their primary care offerings. Then, the pandemic hit and changed everything. Consumers stopped coming into the stores for merchandise but were shopping online and using delivery services.
When the vaccines became available, foot traffic at the stores increased again, and the pharmacy chains made a huge gamble, investing all those billions of dollars to buy VillageMD and Oak Street Health (and Signify Health). And they didn’t stop there. They made plans to open hundreds of additional clinics.
They evidently assumed that people were ready to obtain more of their health care at (or next door to) the neighborhood pharmacy instead of waiting for weeks to see a private practice physician.
But the health care system in this country is so gargantuan and complex, there’s no way to accurately predict patient behavior. Or provider or payer behavior, for that matter.
Just ask health insurers who skewed their business lines more heavily toward the lucrative Medicare Advantage plans. When people were forgoing routine office visits and elective medical procedures during the pandemic, we all knew there would be a deluge at some point, when older patients, in particular, felt it was safe to seek the care they’d postponed. We just didn’t know when the deluge would start or how long it would last.
That explains a big chunk of the increased utilization by MA plan members over the last couple of years. With more members using more health care services, insurers aren’t reaping as much in profits — which in turn explains why many insurers are paring back their plan offerings. Some are exiting multiple markets or turning their focus to other lines of business.
Centene, for example, just announced in late July that it would no longer offer its Wellcare MA plans in six states in the coming year, though it will still offer prescription drug plans in those states. Aetna and Humana are also planning to exit multiple, unspecified markets in 2025.
According to Moody’s Ratings, the profit margin in Medicare Advantage fell from 4.9% to 3.4% between 2019 and 2022. Earnings per member decreased 28% during that same time frame.
Expect to see more insurers scaling back their MA plan offerings as CMS begins conducting more audits to verify diagnoses in MA plan members’ charts. An investigation by The Wall Street Journal revealed that between 2018 and 2021, insurers raked in $50 billion from diagnoses added to MA members’ charts during home visits, many of which were “questionable.”
Episode #169: The future of ASCs with Atlas Healthcare Partners CEO Aric Burke
As the demand for convenient, accessible, and affordable care grows, ASCs have become an increasingly popular alternative. Joins us as Aric Burke, president and CEO of Atlas Healthcare Partners, explores ASCs’ role in everything from lowering out-of-pocket expenses and reducing the surgical burden on hospitals to expanding care access and creating jobs. Listen wherever you get your podcasts or here on YouTube.
What else you need to know
Tenet Healthcare is selling its majority ownership in Brookwood Baptist Health, a Birmingham, Ala.-based health system with five hospitals, more than 70 primary and specialty care clinics, an estimated 1,500 affiliated physicians, and over 7,300 employees. Dallas-based Tenet has signed a definitive agreement to sell its 70% interest in Brookwood Baptist Health to Orlando Health, a not-for-profit health system with 17 hospitals and four more in development, for approximately $910 million in cash. Brookwood Baptist Health was created through a joint venture between Tenet and Baptist Health System in 2015; Baptist Health System will remain in the partnership after the deal between Tenet and Orlando Health has been finalized, which is expected to occur this fall, pending regulatory approval and other closing conditions. When the transaction is completed, Brookwood Baptist Health will become Baptist Health, and Thibaut van Marcke, senior vice president of Orlando Health’s southeast region, will “lead Orlando Health’s efforts in Alabama,” according to the announcement. Conifer Health Solutions, Tenet’s revenue cycle management subsidiary, will enter into a new, expanded 10-year contract to provide services for the Brookwood hospitals.
Chapel Hill, N.C.-based UNC Health has launched a pharmacy benefit management platform called UNC Health Pharmacy Solutions that will serve employer-based health plan members in North and South Carolina. The health system described the PBM platform in a press release as “a tested and proven solution optimized for the Carolinas, delivering up to 32% total savings while providing adjacent pharmacy services that have earned a remarkable Net Promoter Score of 95.” UNC Health said the PBM program uses “unique strategies for biosimilars and weight-loss drugs while maximizing rebates” to achieve lower costs. In addition, clinical pharmacists provide plan members with individualized consultations to optimize medication use.
Winston-Salem, N.C.-based Novant Health plans to acquire an urgent care network from Blue Cross Blue Shield of South Carolina, Becker’s Healthcare reported. The two organizations signed a definitive agreement for Novant Health to buy UCI Medical Affiliates, a holding company that operates Doctors Care and Progressive Physical Therapy. Doctors Care has nearly 200 providers in dozens of locations throughout South Carolina, with a focus on urgent care, family care, occupational medicine, and employee wellness, according to the organization’s website. The acquisition is expected to close in the fourth quarter. Financial terms were not disclosed.
The FDA approved Servier Pharmaceuticals’ Voranigo (vorasidenib), making it the first systemic therapy the agency has approved for a certain type of brain tumor — and the first major treatment advance in low-grade brain cancer in more than 20 years, according to Fierce Pharma. Specifically, Voranigo is approved for patients with Grade 2 astrocytoma or oligodendroglioma with a susceptible IDH1 or IDH2 mutation. The approval triggers up to $1.1 billion in milestone payments to Agios Pharmaceuticals, who sold its oncology business to Servier in 2021 for $1.8 billion up front, a milestone payment of $200 million if Voranigo received FDA approval, and 15% royalties on net sales of the drug in the U.S., Reuters reported. When Agios sold some of its royalty rights to the drug to Royalty Pharma in May, the agreement included a milestone payment of $905 million upon FDA approval. Royalty Pharma estimates there are about 1,500 new diagnoses for the two IDH-mutant gliomas per year in this country and Voranigo could reach annual peak U.S. sales of more than $1 billion, Fierce Pharma reported.
And the FDA granted accelerated approval to Adaptimmune’s Tecelra (afamitresgene autoleucel) for unresectable or metastatic synovial sarcoma, marking the first time an engineered cell therapy has been approved in the U.S. for a solid tumor. Additionally, Tecelra is the first new therapy option for synovial carcinoma — which accounts for approximately 5% to 10% of all soft-tissue sarcomas — in more than a decade, Adaptimmune said in a press release. It is indicated for adults who test positive for at least one of several specified human leukocyte antigens, whose tumors express melanoma-associated antigen A4, and who have already received chemotherapy. Adaptimmune has set Tecelra’s list price at $727,000 for a one-time treatment. According to the FDA, synovial sarcoma affects about 1,000 people in the U.S. annually and most commonly occurs in men in their 30s or younger. An executive at Adaptimmune estimated the addressable population in the U.S. to be around 400 per year, Fierce Pharma reported, noting that this is Adaptimmune’s first approval.
What we’re reading
Closing The Gap In Value-Based Care: Lessons Learned From Provider-Led ACO Experience. Health Affairs, 8.6.24
Virtual diabetes programs aim to prove themselves to insurers. Modern Healthcare, 8.7.24 (subscription may be required)
Plugging Public Health Data into the Health IT Ecosystem to Protect National Health. NEJM Catalyst, 7.17.24
