Walgreens targeting tech acquisition as it looks to scale healthcare business unit

Retail drugstore giant Walgreens is bullish on scaling up its primary, post-acute and home care businesses as part of its long-term strategy to become a consumer-centric healthcare company.

"We are rapidly scaling U.S. healthcare, already raising long-term sales targets with a clear path to achieve profitability, starting in fiscal year '24," Walgreens CEO Roz Brewer said last week during the company's fiscal fourth-quarter earnings call.

Walgreens executives told analysts that the company is raising its fiscal 2025 sales target for the U.S. healthcare division by 20% to between $11 billion and $12 billion, with the segment expected to achieve positive adjusted EBITDA by fiscal year 2024.

"Fiscal 2023 will be a year of accelerating core growth and rapidly scaling our U.S. healthcare business," Brewer said in a press release.

The company is bullish on the future performance of its healthcare business unit. "VillageMD, Shields and CareCentrix will drive increasingly high contributions as the businesses mature. Additionally, investments in the Walgreens Health organic business will be partially offset by positive contributions from clinical trials expansion and integration synergies," Walgreens Chief Financial Officer James Kehoe told analysts.

In June, the company announced it was rolling out a clinical trials business as its "next growth engine" of consumer-centric healthcare solutions.

The company's healthcare arm in the U.S. had fourth-quarter sales of $622 million, representing 34% growth on a pro forma basis. Walgreen's specialty pharmacy business Shields Health Solutions grew 48%, driven by key contract wins, further expansion of existing partnerships and strong executional focus, executives said.

Primary care company VillageMD grew 31%, reflecting existing clinic growth and clinic footprint expansion, according to a company press release on its financial results. 

Walgreens' U.S. healthcare unit encompasses VillageMD, Shields Health Solutions and CareCentrix as well as the organic Walgreens Health business, which focuses on population health through initiatives such as Walgreens Health Corners.

The company's healthcare segment now covers over 26 million lives, cared for through a network of over 12,000 providers in communities across all 50 states, according to John Driscoll, the company's newly appointed president of U.S. healthcare.

Last year, Walgreens invested $5.2 billion in primary care company VillageMD to become the majority owner as it looks to open hundreds of new clinics across the U.S. 

"VillageMD is leading the way in value-based care for the nation with over 340 clinics now open, including about 150 co-located with Walgreens, on pace towards 200 by the end of calendar year '22," Brewer told analysts on the earnings call last week. "We’re also adding Health Corners on schedule with 70 now on the way to 100 by the end of '22."

Driscoll told analysts VillageMD is "uniquely positioned as one of the largest primary care providers in the U.S."

"We can now leverage the combined power of the Walgreens stores and our trusted brand with primary care. VillageMD providers touched the lives of over 1.6 million patients, covering over 430,000 value-based patients through over 340 clinics in 22 markets. 152 clinics are co-located with Walgreens stores, half of which are in underserved areas," he said.

Walgreens has stepped up its healthcare investments in the past year.

The company plans to accelerate acquisitions of two other companies: post-acute and home care company CareCentrix and Shields Health Solutions. Walgreen recently announced it would pay $392 million to buy CareCentrix, after investing $330 million in the company last year.

Walgreens plans to buy the remaining stake in Shields Health Solutions for approximately $1.37 billion.

"Through our accelerated rollout, VillageMD already covers 433,000 lives under value-based arrangements, including 161,000 Medicare and MA value-based lives. At the same time CareCentrix has 19 million total contracted lives, and Shields is partnered with 75 health systems," Brewer said.

"Our healthcare strategy is now coming to life and far from just being in the planning stages," she said.

Brewer added, "We are moving swiftly to implement our vision of consumer-centric tech-enabled healthcare solutions that improve outcomes and lower costs for patients, providers and payers."

The pharmacy retail giant now may be eyeing a health technology acquisition as its next strategic play.

"We’re pleased with the assets that we have. But we remain committed to our prior conversation that probably our next asset will look something like a tech asset," Brewer said. "In terms of what we would do next is looking to really carefully tether these assets together. And it lends us to look in the technology space."

Brewer noted the company would seek out acquisition targets achieving earnings before interest, taxes, depreciation and amortization.

"In the end, scale is critical, but healthcare is local," Driscoll said. "We’re creating a nationally scaled healthcare business, which will leverage our entire portfolio to deliver better care at lower costs. And by focusing our portfolio on these higher-growth markets, we will accelerate the return on our investment and our path to profitability in U.S. healthcare."

Overall, Walgreens Boots Alliance recorded total sales of $32.45 billion for the fiscal fourth quarter, down 5.3% year over year. Total revenues for fiscal 2022 were $132.7 billion, up 0.1% from the year-ago period.

The company swung to a loss in the three-month period. Its net loss was $415 million, or 48 cents per share, compared with net income of $627 million, or 72 cents per share, a year earlier.

Sales in Walgreens’ retail and pharmacy division in the U.S. decreased by 7.2% to $26.7 billion in the fourth quarter compared with the year-ago period.