Walgreens posts $3.7B loss in Q1 on opioid settlement but boosts sales outlook in 2023

Drugstore chain Walgreens posted a quarterly net loss of $3.7 billion Thursday as it took a $6.5 billion opioid litigation charge, sending its shares down 7% this morning.

In November, Walgreens and rival CVS agreed to pay a combined $10 billion to resolve lawsuits brought by states and local governments alleging the retailers mishandled prescriptions of opioid painkillers. CVS would pay nearly $5 billion over 10 years, while Walgreens would pay $5.7 billion over 15 years, according to statements released by state attorneys general.

CVS took a pretax charge of $5.2 billion in its third quarter related to the settlement.

Walgreens' net loss in the first quarter was $3.7 billion,  or $4.31 per share, compared to net income of $3.6 billion,  or $4.13 per share, in the year-ago quarter. The decrease was driven by a $5.2 billion after-tax charge for opioid-related claims and litigation, the company reported.

But the retail drugstore giant reported quarterly earnings and sales for the fiscal first quarter that ended Nov. 30 that topped analysts’ expectations.

Walgreens posted fiscal first-quarter adjusted earnings of $1.16 a share on revenue of $33.4 billion, compared with $1.68 a share on $33.9 billion for the same period last year. Analysts surveyed by FactSet had expected $1.14 a share on $32.9 billion. 

Walgreens maintained its full-year earnings guidance of $4.45 to $4.65 as "strong core business growth is more than offset by lapping fiscal year 2022 COVID-19 execution, and currency headwinds."

The company's U.S. retail pharmacy sales during the quarter dropped 3% to $27.2 billion. Retail drugstores have seen waning demand for COVID-19 vaccinations, which helped boost business in 2021 and 2022. Walgreens administered about 8.4 million vaccines in the first quarter, down from 15.6 million in the same period a year earlier. 

The company raised its full-year sales number to between $133.5 billion and $137.5 billion, reflecting its just-sealed Summit Health acquisition, refreshed currency rates and first-quarter sales ahead of expectations, company executives said.

Walgreen also closed its acquisition of Shields Health Solutions last month. The company announced in September plans to buy its remaining stake in the specialty pharmacy company for approximately $1.37 billion.

Walgreens' U.S. healthcare segment brought in first-quarter sales of $989 million, an increase of $938 million compared to sales of $51 million a year ago. On a pro forma basis, this segment's businesses grew sales at a combined rate of 38.4% in the quarter. VillageMD grew 48.7% reflecting existing clinic growth and clinic footprint expansion. Shields grew 44.1% driven by recent contract wins, further expansion of existing partnerships and strong executional focus, the company reported.

CareCentrix grew 22.3% as a result of additional service offerings with existing partners.

This week, the company closed its $8.9 billion acquisition of Summit Health-CityMD, a provider of primary, specialty and urgent care.

"We have raised our full-year sales guidance by over $3 billion to reflect the closing of the Summit Health transaction, refreshed currency rates and a good start to the year," James Kehoe, Walgreens' global chief financial officer, said during the earnings call Thursday.

The addition of healthcare provider Summit Health, he said, will further enhance Walgreens' portfolio of leading assets across the care continuum, drive meaningful synergy opportunities and accelerate the path to profitability.

The Summit Health-CityMD deal not only expands Walgreens' healthcare market footprint but also accelerates the company’s path to profitability for its U.S. healthcare segment. Walgreens anticipates its healthcare business to turn a profit by year-end 2023, executives said.

In previous comments, Brewer said the Summit Health deal should generate about $150 million in cost synergies.

The drugstore chain is looking to expand beyond its core pharmacy retail business and has made strategic moves to grow its healthcare footprint. The transaction creates one of the largest independent provider groups in the U.S., according to the company. Combined, VillageMD and Summit Health will operate more than 680 provider locations in 26 markets.

"WBA delivered a solid start to the fiscal year, as we continue to accelerate our transformation to a consumer-centric healthcare company. We're making significant progress in driving our U.S. Healthcare segment to scale and profit, including the recent VillageMD acquisition of Summit Health," CEO Rosalind Brewer said in a statement.

Walgreens also expects to close its acquisition of post-acute and home care company CareCentrix in the third quarter of fiscal 2023. The company announced plans last year to snap up its remaining stake in CareCentrix for approximately $392 million.

Kehoe said the company is "taking a pause" on M&A in the short term, but he did note that Walgreens could buy smaller companies with specific capabilities needed to advance its organic business. "

"We're not going to go out and do a $2 or $3 billion acquisition on a health tech company. We're likely to be very targeted and it'll be in the hundreds of millions not in the billions," Kehoe said.

Last year, Walgreens invested $5.2 billion in VillageMD and said it planned to open at least 600 Village Medical at Walgreens primary care practices across the country by 2025 and 1,000 by 2027.

Executives said the company achieved its 2022 target to open 200 co-located VillageMD clinics, as part of 393 total clinics now open.

"This was a landmark quarter for accelerating the build-out of our next growth engine, the US healthcare segment. We invested $3.5 billion to support VillageMD's acquisition of Summit Health, creating one of the leading independent provider groups in the country," Brewer said during the earnings call Thursday. "We recognize the critical importance of scale and value-based care delivery and density and attractive markets. This highly strategic transaction expands VillageMD's addressable market with primary care, multi-specialty and urgent care and reinforces our approach across the care continuum. We see meaningful synergy potential over time."

She added, "The deal is also immediately EPS accretive and accelerates profitability for US healthcare." 

VillageMD is conducting a national search for a president of the company, reporting directly to Tim Barry, CEO and chair of VillageMD. Jeff Le Benger, M.D., current chair and former CEO of Summit, will act as interim president.