Yves here. Readers will likely find the article below to be unduly cheery on the topic of “Whither Walgreens under the tender ministrations of its new private equity owner, Sycamore?” The drugstore business in the US has been consolidating, with close to 1/3 closing since 2010 despite the population continuing to rise. Independent drugstores have been the big loser, but even Rite Aid is shuttering more stores, in this case as the result of working through its second bankruptcy.
CVS has decided not to let patients call the pharmacy any more, but somehow they do have the time to call pharmacy customers to sell them vaccinations….even ones who have never gotten a vaccination at a pharmacy. This suggests that the race to the bottom is very much on. I hope readers will give updates on any changes, particularly cuts in service, at Walgreens.
Axios recently gave an overview of the deteriorating fortunes in pharmacy-land:
The big picture: Independent pharmacies were likelier to close from 2010 to 2021, possibly because pharmacy benefit managers steered patients to their own in-network pharmacies, University of California, Berkeley and University of Southern California researchers found.
- Inadequate reimbursements from Medicare and Medicaid also factored in neighborhoods with fewer commercially insured people, which tended to have more Black and Hispanic patients….
Threat level: Pharmacy closures aren’t just an inconvenience; in some disadvantaged areas, a pharmacy can be the difference between having care or not.
- A continuation of the drop-off could also undercut COVID-era trends that saw pharmacists play a bigger role administering care, distributing vaccines, antivirals and tests and helping patients navigate the health system.
- It’s not enough to offer digital or mail-order options, Rob Andrews, CEO of the Health Transformation Alliance, told Axios.
- “People who don’t have access to a lot of digital resources and/or income are going to have a harder time getting access to stuff they need, because the drugstore that used to be two blocks away isn’t there anymore,” Andrews said…
But bigger forces could be hastening some pharmacies’ decline. Regulators are focusing more attention on PBMs’ role in the drug supply chain, including driving up prices and squeezing out independent pharmacies.
- The Federal Trade Commission has charged the nation’s biggest PBMs with forcing pharmacies to swallow unfair contracts — a charge they’ve disputed.
- The study [on pharmacy closures] calls, in particular, for policymakers to increase Medicare Part D and Medicare reimbursement rates for pharmacies that are at the highest risk of closure.
- They also call for mandates on PBMs to expand preferred pharmacy networks to independent pharmacies.
Between the lines: There’s a widening gulf between what patients want and what the system is willing to pay for, Peter Bonis, chief medical officer at Wolters Kluwer Health, told Axios.
- A recent survey the firm did found most patients still prefer to get their drugs from brick-and-mortar pharmacies. The majority are also concerned about being able to get essential medications close to home due to closure.
Shorter: there are no magic bullets here, since industry incumbents would already have found them. So expect further cost-cutting and crapification.
By Patrick Aguilar, Professor of Practice of Organizational Behavior, Washington University in St. Louis and Peter Boumgarden, Professor of Family Enterprise, Washington University in St. Louis. Originally published at The Conversation
Pharmacies are more than just stores – they’re vital links between people and their health care.
One of us, Patrick, witnessed this firsthand in 2003 while working as a pharmacy technician at Walgreens in a midsize West Texas town. Each day involved handling hundreds of prescriptions as they moved through the system – meticulously counting pills, deciphering doctors’ handwriting and sorting out confusing insurance issues. The experience revealed that how pharmacies are owned and managed is as much a public health issue as it is a financial one.
Fast-forward to today, and Walgreens – one of the world’s largest pharmacy chains, which filled nearly 800 million U.S. prescriptions in 2024 – is at a turning point. In March, the company announced it would be acquired by private equity firm Sycamore Partners for US$10 billion, just 10% of its peak market value. That deal takes the storied pharmacy chain off the public market for the first time in nearly 100 years.
We’re professors who study the intersection of medicine and business, and we think this deal offers a window into the future of pharmacy care. It matters not just to pharmacists but also to the tens of millions of Americans who rely on outlets like Walgreens to meet their everyday health needs.
The Rise and Struggles of Walgreens
A lot has changed in the pharmacy industry since 1901, when Charles R. Walgreen Sr. purchased the Chicago drugstore where he served as a pharmacist. The company went public in 1927, expanded rapidly throughout the 20th century and grew to 8,000 stores by 2013. By 2014, a merger with the European pharmacy chain Alliance Boots made Walgreens one of the largest pharmacy chains in the world.
More recently, however, the picture for the pharmacy industry hasn’t been so rosy. Labor costs have risen. Front-end retail sales – things like snacks, greeting cards and cosmetics – have fallen. And financial pressures from pharmacy benefit managers – those third-party groups that manage the cost of prescription drug benefits on the behalf of insurers – have grown.
All of these things have significantly constrained revenues across the industry, leading stores to shutter. Some estimates suggest that as many as one-third of U.S. retail pharmacies have closed since 2010.
Against that backdrop, Sycamore Partners’ March acquisition of Walgreens raises big questions. What does Sycamore see in this investment, and what might their strategies imply about the future of American pharmacy care?
Framing the Private Equity Bet
Private equity firms typically buy companies, streamline their operations and seek to sell them for a profit within five to seven years of the acquisition.
This growing movement of private equity into the global economy is by no means limited to health care. In 2020, private equity firms employed 11.7 million U.S. workers, or about 7% of the country’s total workforce. The total assets under management by such investors have grown by over 11% annually over the past two decades, a trend that’s expected to continue.
In looking at Walgreens, Sycamore, like many of these businesses, likely sees an opportunity to buy low, cut costs and improve profitability. One survey of private equity investors found that the most common self-reported sources of value creation in these deals for companies of Sycamore’s size were changing the product and marketing it more robustly to drive demand, changing incentives for those within the business, and facilitating a high-value exit.
While private owners may have more patience than public markets, critics argue that private equity firms tend to have a short-term focus, looking for quick, predictable services of margin improvement – like, for example, cutting jobs.
There’s some evidence in favor of that claim. One study found that employment often drops in the years following a private equity buyout. And if the focus shifts to repaying debt or prepping for resale, long-term projects, such as investing in future innovation, can get deprioritized.
The history of privatized public companies offers a mix of successes and failures. Dell Technologies and hotel chain Hilton are two prominent examples of companies that went private, restructured successfully and came back stronger. In those cases, going private helped management focus without the constant pressure of quarterly earnings reports.
On the other hand, companies such as Toys R Us, which was taken private in 2005 and filed for bankruptcy in 2018, show how high debt and missed innovation can lead to collapse.
What’s Next for Walgreens
So, where does this leave Walgreens − and the investors involved in the deal?
If part of the returns will be driven by “buying low” – the easiest indicator of potential future success to measure as of today – Sycamore started well: Its purchase price represents a mere 8% premium over the market trading value on the day of the announcement, significantly less than the 46% seen across industries in 2023. That said, Sycamore financed 83.4% of the purchase with debt, a number on the high end for these kinds of transactions. Health care groups have pointed to this number while raising concerns that innovation-focused investments may take a back seat to debt obligations.
As the dust settles on the purchase, Sycamore has indicated an interest in splitting Walgreens into three business units: one focused on U.S. pharmacies, one on U.K. pharmacies and one on U.S. primary health care through its VillageMD subsidiary.
That’s not unusual: Sycamore has used a similar approach before with its investment in the office supply retailer Staples, a strategy that has garnered strong financial returns but been called into question for its long-term sustainability.
Given the significant financial challenges VillageMD has faced since its acquisition by Walgreens, this represents an opportunity to separately evaluate and optimize its performance. Meanwhile, Sycamore’s historic focus on retail and customer-focused businesses might help it modernize the in-store experience or optimize staffing.
For more than a century, Walgreens has survived and adapted to sweeping changes in retail. Now, it’s entering a new chapter – one that could reshape not just its own future but the role of pharmacies in American life.
Will Sycamore help Walgreens thrive, using its resources to strengthen services and deliver more value to customers? Or will pressure to generate quick returns create problems? Either way, the answer matters – not just for investors but for anyone who’s ever relied on their neighborhood pharmacy to stay healthy.
A few years back, here in central VA, possibly the 2000’s, it seemed like there were pharmacies hoping up on every corner, in every supermarket and big box store. There was a couple CVS stores near our home so we went there. However perhaps around the time Caremark took over (? Or 2015 or so) service got bad. The final straw for me was waiting in long lines to pickup meds and they didn’t have some antibiotics I needed in a timely way. Fortunately we also about 10 min from a costco so I switched over. Way way better pricing and I can pick up prescriptions easily, even if the hours are not quite great as the cvs.
Go private with a lot of debt, extract huge dividends as immediate rewards to those involved, and lean on remaining employees and customers to reduce expenses and increase revenues, regardless of the costs.
Not just for pharmacies. Soon coming to other businesses near you. Don’t look to Congress for help as you don’t donate enough. / Not Sarcasm.
Walgreens owns medical practices, which have been losing money. They own (with Cigna) Village MD which bought the merged City MD and Summit Medical Group. Searching the internet doesn’t bring up any firm plans, but suggests a divestiture.
So old-fashioned buy, load up with debt, and spin off?
Walgreens showed it was easy pickings after all that missing due diligence in dealing with Theranos.
83% debt, but the future might be bright?
One wonders why he didn’t cite some overall review of how private equity tends towards enshittification of services (streamline), job reduction, and dumping so much debt onto the company that the only winners are the banks.
I worked for Boots in the early 90s when it was still run predominantly by a combination of stolid pharmacists cum store managers and head office retail buyers who were deeply into the culture of the business. They tended to spend their whole careers there. The legacy of Jesse Boot and his philanthropy was very much alive.
But the business was at an inflection point and the old culture was also slowly dying. The company moved to embrace shareholder value / Value Based Management under the “guidance” of Marakon and a Group CEO ex Plessey defence contractor. The latter typically used to appear in Nottingham in his own private helicopter and built a grand new HQ building for himself and the team at “Group”. This was so that they would not get sucked into the detail of the retail business. Makes me think a little of the philosophy that Boeing developed. Since leaving in 1996 my sense from a distance has then been of nothing but downward spiral.
Today, I can hardly bear to enter the stores given the mess they are in with haphazard town trays (merchandizing boxes) strewn across the sales floors, a general lack of maintenance and often music blaring out.
I expect these changes will not make things better. To be fair, UK pharmacy / retail has become a much tougher business to be in over the last thirty years and as you say with respect to the US there is no magic bullet.
By the way, I left to go to a US Business School and then spent twenty five years in consulting! It was a bit of a case of if you can’t beat them then join them. Life creates incentives and we choose how we respond.
NC seems especially bold today…. :-)
As a former free-lance, I had an individual retirement account (IRA), which is self-managed. Having free lances manage their own pension programs is one of the lame-brained ideas of late-stage capitalism. Yet I learned a great deal.
My first C.P.A. and financial advisor was wildly conservative. (Yes, somehow I ended up with 100 shares of General Electric, before it too fell apart.)
I was in Hewlett Packard during the Carly Fiorina fandango. What a mess she made. I had, ohhhh, 300 shares, and the dissident board members (the anti-Fiorina people) were calling *me* up to vote my proxies for change. Hmmm.
Walgreens was / is enlightening. The last neighborhood I lived in in Chicago was where Walgreens was founded. I lived some four blocks from the first pharmacy.
Walgreens was considered a solid investment. It was so much part of Chicagolandia that it was hard for me to tell if it was overextended — every neighborhood in Chicago seem to have three Walgreens. At least.
The merger with Alliance Boots was telling.
Pessina and Barra have a whiff of sulfur about them.
https://it.wikipedia.org/wiki/Alliance_Boots
They were “domestic partners,” or something, which had to be noted in the annual report. Yes, the Walgreens annual report, which had once been dull, turned into Peyton Place Pharmacy. Nepotism. Weird reporting about company airplanes and helicopters.
The usual board of directors made up of directors who tended to be nincompoops, most of whom remained on the board much too long.
Internally, the Walgreens stores lost their focus. There were aisles of chocolates and potato chips. There were cleaning supplies. Why? The store I used the most was across the street from two large grocery stores — one a Jewel, one a part of a beloved local indy chain (of two stores).
The slicing and dicing into divisions, which also happened to Hewlett Packard later, till HP was minced into oblivion, is now going to happen to Walgreens.
And wait till Sycamore figures out how much choice real estate Walgreens is sitting on. There goes that store on Clark and Catalpa…
I’d lay good odds that Sycamore already knows, down to the dollar. I’d further guess that one of their first moves will be to sell it all (perhaps to a new property holding company) and lease it back to the stores at ‘market rates’.
They will then run down inventory in the store business to create a temporary bump in profits, hype it as a turnaround story, and find a sucker to unload it on. Once the higher operating costs sink the business, Sycamore will be left with a nice return on the sale and a bunch of desirable real estate.
See also: Dick Smith, Red Lobster, and many others.
“Independent pharmacies were likelier to close from 2010 to 2021, possibly because pharmacy benefit managers steered patients to their own in-network pharmacies, University of California, Berkeley and University of Southern California researchers found.”
POSSIBLY? are you kidding me? PBM’s have killed independents by design. My sister works as an independent pharmacist in St Paul MN. The owner hasn’t paid himself for over a year. They regularly LOSE money on prescriptions. That is right PBMs have it so that an independents main source of income (their service as pharmacists) costs them money. Cant think of a worse problem for a business! or a more unfair monopolistic behavior by PBMs. Congress will look into it…
It’s too late. PBM’s win. They are closing at the end of June, having been in business since 1901.
Now we get to see Walgreens attempt to be right sized by PE folks who failed to see there is no were to go with staffing. At least the can mortgage the property and lease it back to themselves to strip something out. They will be bankrupt in 5 years. no doubt about it. Way too much debt to maneuver in any dynamic and self preserving way. Must be like the PE B team at work.
I think there is a word of warning to anyone thinking of investing in a pharmacy company going forward. There is a very likely dramatic future trend that is just getting started. I have personally been shocked at how easily this has been picked up by the public.
Just a year ago, GLP1s were 1300-1500 dollars a month. Insurance will only pay for them if the patient truly has diabetes AND they have tried multiple other options. I have the months of scars of prior authorization conflicts to absolutely verify that assertion.
Then, several months ago, the FDA ( still under Biden) took away the permission that compounding pharmacies had been granted to give relatively much less expensive GLP1s – usually on the order of 400-500 dollars a month.
Then late last fall, the first company, Eli Lilly, started selling their GLP1s directly to the consumer – no pharmacy, no PBM, no insurance, no nothing – just directly selling its product Zepbound straight to the consumer. Of course, they had to have a prescription – but that is it. The website is called lillydirect.com. Patients get the med fedex’d the next day. The starting dose on this Zepbound 2.5 mg weekly – is right at 400 dollars. To this day, in the pharmacies, it is about 900 dollars. So, just a mass migration of patients to lillydirect and there is no wonder to me why Lilly is lapping Novo-nordisk in stock value – novo just bothered to get their similar program online the past few months. ( It is a total disaster – very difficult to use, etc).
Lilly has proven it to me. If these Pharma companies so choose, they can do this with ALL of their products. Look out below, Walgreens CVS and Rite-Aid.
FYI, I never understood the Walgreens concept to begin with. The pharmacies were stuck in the corner – the vast majority of the rest of the store was row after row of candy and soda ( in a store ostensibly for people’s health) with prices much higher than grocery stores. Row after row of cheap cosmetics, 1-2 rows of Over the counter meds. Lately, the entire front taken up by a primary care office in which patients are never to be seen. This does not seem to be the recipe for success. But what do I know, I have just been in health care for 35 years.
Seems like there’s a war on between pharmacy benefit managers (PBMs) and insurance companies and customers. This ends up crushing retail storefront pharmacies. PMBs have started TV ads touting how great they are at lowering drug prices. Really. Lilly’s ‘direct to the consumer’ model bypasses the PBM middlemen (that rake off huge profits). No wonder Lilly can sell GLP1s more cheaply and possibly make an even larger profit by eliminating the PBM middlemen. Seems to be a growing trend. Not saying it’s a good trend.
“The pharmacies were stuck in the corner …..”
Walgreen’s in the Seattle area sells wine, along with candy, cosmetics, cleaning supplies, etc.
The CVS/RiteAid (I find them indistinguishable) within walking distance from my daughters house in a New Jersey suburb sells milk, canned goods (soups, etc.), ultra-processed snacks, along with wrapping paper, stationery supplies, cosmetics, etc. There is no grocery store within walking distance and there is a large block of senior housing around the corner. Most of the people in line are buying food items. No fresh fruit or produce, of course.
Again, in the Seattle area, my daughter-in-law uses the Costco pharmacy, especially to fill the high-priced prescriptions for their dog.
So here in Hawaii, I see WalMart and Costco both seem to have significant pharmacy business. I don’t know if Walgreens is doing well here — don’t see much marketing. A number of years ago CVS bought out our local chain, “Longs”. That trade name is so valuable here that all the stores keep the name and “Make Longs a part of your day” has to be one of the best marketing pitches, along with their weekly “value book”. Though on the neighbor islands it seems like most of the Longs are operated within Target stores.
The specialty of terrifying entities like Sycamore is capturing assets through debt, converting those assets into liquid assets as quickly as possible—eliminating jobs and businesses—and pocketing the difference between the debt acquired and the liquidated assets. Whether the company is a pharmacy chain or a hat factory, it matters little to them.