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Walgreens Boots Alliance Inc WBA

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1-Star Price

PREMIUM

5-Star Price

PREMIUM

Economic Moat

PREMIUM

Capital Allocation

PREMIUM

Adjusting Walgreens’ Moat Rating Over Sustained Reimbursement Pressures; Lowering FVE to $44

Dylan Finley, CFA Equity Analyst

Analyst Note

| Dylan Finley, CFA |

After taking a fresh look at Walgreens Boots Alliance, we are lowering its narrow moat rating to none and maintaining our negative moat trend rating, as we believe ongoing reimbursement pressure has already impaired its moat. Gross margins have steadily declined from just under 30% in 2013 to 20% in 2020, primarily as a result of reimbursement pressures from pharmacy benefit managers. The top three PBMs combined adjudicate nearly 80% of all prescription drug claims on the behalf of health plan payers. By comparison, the top three retail pharmacy chains control just under half of all prescription drug revenue and have relatively less negotiation leverage. In addition, PBMs’ relationship to payers and central role in designing pharmacy networks on behalf of beneficiaries affords them leverage in negotiations with retail pharmacies. Our high uncertainty rating reflects questions surrounding the rate of margin deterioration going forward, and where the floor on prescription drug margins is. Combining our reduced moat rating  with the probability-weighted increase of our estimated long-term U.S. tax rate to 26% from 21%, we are lowering our fair value estimate to $44 from $50.

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Company Profile

Business Description

Walgreens Boots Alliance is a leading retail pharmacy chain, with over 21,000 stores in 50 states and 11 countries. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading market share of the domestic prescription drug market at about 20%. In 2021, the company sold off a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstores (40%).

Contact
108 Wilmot Road
Deerfield, IL, 60015
T +1 847 315-3700
Sector Healthcare
Industry Pharmaceutical Retailers
Most Recent Earnings May 31, 2021
Fiscal Year End Aug 31, 2021
Stock Type Distressed
Employees 331,000

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