New Walgreens CEO signals pharmacy giant will shift to new drug pricing models

In his first earnings call since taking over as CEO of Walgreens, Tim Wentworth signaled the drugstore retail giant is exploring new pharmacy models as cost-plus drug pricing gains momentum.

"We welcome and will work with payer and PBM partners on any model that recognizes and reimburses pharmacies for the unmatched value we provide patients, including pharmacy services, as well as those models that can ensure more transparency and predictability in reimbursement," Wentworth told analysts during the drugstore retail giant's fiscal year 2024 first-quarter earnings call Thursday.

Wentworth previously was CEO of both Evernorth, the health services division of Cigna Group, and Express Scripts. He jumped on board at Walgreens in October.

His comments come as both CVS and Walgreens recently announced new programs designed to reduce prescription drug prices for many patients and bring greater price transparency to consumers.

CVS announced in December it was overhauling the way it reimburses its pharmacies for prescription medications as the healthcare industry faces increased scrutiny for high drug prices. Under a new "cost-plus" pricing model, CVS will shift to fixed rates for reimbursements from pharmacy benefit managers (PBMs), the company said.

The country's largest PBM, Wentworth's former company, also is taking a page out of Mark Cuban's book. Express Scripts is launching of its new pharmacy network option, ClearNetwork, which operates under a cost-plus model. In this approach, clients pay a "straightforward" acquisition cost for individual drugs as well as a small markup that covers dispensing and service costs.

Walgreens, in turn, recently launched a new digital marketplace, called Rx Savings Finder, designed to help customers save money on prescription medications. 

Wentworth said he sees momentum toward “cost plus” models. "If you look at the innovation and reimbursement in pharmacy that's likely to evolve, it's likely to evolve in such a way that the margin per drug is going to be largely based on how much service do we provide to patients that's receiving it," Wentworth told analysts during a Q&A on the earnings call.

Wentworth expects to see payment model changes in the next year or two, he told analysts. "We are prepared and already have sat down and had conversations to support these models, and we could convert to a cost-plus model overnight.We are a willing player in terms of what we would need to do to compete and win patients on a cost-plus basis," he said.

Based on his 25 years of PBM experience, Wentworth said he sees "very little left ... in the tank" to squeeze traditional retail pharmacy reimbursement.

"There's very, very strong clear messaging in the marketplace from us and others that would point to the fact that the way that retail pharmacies will create value in the next 10 years isn't going to simply be lowering the unit cost of the drugs that we're purchasing and distributing because, quite frankly, that largely now is not where the real gains can be made for payers and for patients," he said.

"We believe we can help drive a transition in the marketplace over time to a more value-based model, which will frankly show well through to the end users and the patients," he said. "I think that as I look forward in the next three or four years, we can play a leadership role in that in a way that helps PBMs win."

He added, "As you've seen, two very large PBMs are responding to more pull from the marketplace than we may have experienced historically as it relates to either pass-through or transparent models, and therefore, announcing these programs that they're putting out in the marketplace that we can play very, very effectively in. So the fact that there may be more marketplace pull there only presents for me a sense of urgency for our team to do what we've already done and accelerate additional value creation that we can, A, be paid for, and B, that our payers can go out and win with."

Efforts to bolster financial performance

Walgreens' stock fell roughly 10% in morning trading after it announced it would slash its dividend nearly in half to free up capital to grow its business. The company is cutting its next dividend by 48%, to 25 cents a share to "strengthen its long-term balance sheet and cash position." Walgreens has paid a dividend in 365 straight quarters, or 91 years.

"This action reinforces our goal of increasing cash flow, while freeing up capital to invest in sustainable growth initiatives in our pharmacy and healthcare businesses, which we believe will ultimately improve shareholder value," Wentworth said in a statement.

Walgreens is on track with cost-cutting initiatives that aim to cut $1 billion in expenses this year. The company also wants to increase cash flow and free up capital to spend growing its pharmacy and healthcare businesses.

"My headline to you is that everything is on the table to deliver greater shareholder value," Wentworth told analysts on the call.

Walgreens is making moves to improve its financial performance after a massive growth spurt in which it acquired home healthcare business CareCentrix and VillageMD's acquisition of Summit Health-CityMD. Walgreens has closed 27 underperforming VillageMD clinics as part of a plan to close 60 clinics this year.

"In U.S. healthcare, we are on track to achieve significant year-on-year profit improvement. VillageMD is rapidly realigning operating costs with sales. The team is executing on several initiatives, from revenue cycle management to procurement with operational actions spanning the organization," Wentworth said.

Wentworth said Walgreens is committed to its primary care business with VillageMD along with Summit Health and CityMD, but does not plan to invest in additional primary care assets.

The company is looking to build healthcare services on top of its retail pharmacy store network.

The company's healthcare segment includes primary care provider VillageMD; Summit Health/CityMD, a provider of primary, specialty and urgent care; CareCentrix, a post-acute and home care provider; specialty pharmacy Shields Health; and Walgreens Health.

"I think the headline I put out there is that we are going to evolve our services, our strategy, from a health care standpoint to a health services strategy, which I think a retail pharmacy basis for that. I thought a PBM basis was terrific to build a health services business. I think a retail pharmacy base is a fabulous base to build a health services business from because of the engagement," Wentworth said.

Partnerships also could be a key part of this strategy as Walgreens is now working with startup Pearl Health to expand its reach into value-based primary care. New York City-based Pearl Health is a technology company that helps independent physician practices participate in value-based care models. Walgreens plans to leverage its capabilities, including prescription fulfillment, medication adherence, immunizations, care gap closure and diagnostic testing, to work with the startup to enable community-based primary care physicians to take advantage of new payment models.

"We recognize that VillageMD and CityMD represent a fabulous sandbox for us to build services, test them and demonstrate that they perform and help them achieve their objectives, while at the same time putting us in a position of growing," Wentworth said. "Village has certain geographies they're very deep in, but there are geographies they're not in at all. There are large provider opportunities for us to partner in similar ways in those marketplaces to grow our business and, importantly, help them grow theirs."

First-quarter results

Walgreens reported fiscal first-quarter sales were up 10% to reach $36.7 billion, reflecting sales growth in the U.S. Retail Pharmacy and International segments, and sales contributions from the U.S. Healthcare segment.

The company reported a loss of $67 million, compared with $3.7 billion a year earlier when it got hit with a charge tied to settling opioid-related litigation.

The quarterly results beat Wall Street expectations. Analysts expect earnings of 62 cents per share on $34.95 billion in revenue, according to FactSet.

The company's U.S. retail pharmacy business posted revenue of $28.9 billion, up 6.4% from the year-ago quarter. 

The U.S. healthcare segment's sales grew 12% to reach $1.9 billion. The growth was led by VillageMD and Shields. VillageMD grew 14% on a pro forma basis, reflecting same clinic growth, additional full-risk lives, and increased multi-specialty productivity. Shields grew 27%, driven by recent contract wins and further expansion of existing partnerships, according to the company's Q1 earnings report.

The company said its maintaining guidance for the full fiscal year. Walgreens expects fiscal 2024 adjusted earnings per share of $3.20 to $3.50 and 2024 revenue to be in the range of $141 billion to $145 billion.