Shares of the struggling pharmacy chain Walgreens Boots Alliance experienced an 8.4% decline on Tuesday, as of 3:22 p.m. ET. This drop can be attributed to two main factors: Pfizer’s introduction of a direct-to-consumer telehealth and e-commerce platform, and Eli Lilly’s decision to reduce prices by 50% for certain doses of its GLP-1 drug, Zepbound, when ordered through its LillyDirect e-commerce platform.
The full impact of these developments on Walgreens is uncertain, but investors seemed quick to offload Walgreens stock in response to the direct-to-consumer announcements without delving deeper into potential outcomes.
Direct-to-Consumer Initiatives by Pfizer and Lilly
Pfizer launched Pfizerforall on Tuesday, a direct-to-consumer and telehealth initiative designed to simplify access to care for conditions like migraines, COVID-19, and the flu. This platform aims to ease the strain on overcrowded healthcare systems and facilitate same-day care for patients.
Eli Lilly, a competitor, had introduced a similar platform earlier in January. Lilly Direct, its direct-to-consumer pharmacy, announced a 50% discount on its GLP-1 weight-loss drug, Zepbound, for direct orders.
For Walgreens investors, the pertinent question is how these announcements will influence the company’s future prospects.
Pfizerforall’s innovations include:
- Same-day telehealth appointments or connections with local community providers
- Home delivery of prescriptions and tests
- Scheduling of vaccination appointments
- Co-pays and discounts on Pfizer medications
While there could be some positive outcomes for Walgreens, such as potential partnerships with local providers like Summit Health, which Walgreens owns, and collaboration with Pfizerforall for vaccine scheduling at its retail locations, the negatives seem to overshadow these benefits. Direct telehealth consultations might reduce traffic to Summit Health, and more critically, the direct delivery of drugs and tests could negatively impact Walgreens’ retail pharmacy business, which accounts for a significant portion of its sales.
Long-Term Challenges Resurface
Despite being a potential partner in Pfizer’s direct initiatives, Walgreens faces the threat of losing more drug sales to the direct-to-consumer platforms of major pharmaceutical companies. Pharmacy drug sales made up about 56% of Walgreens’ revenue last quarter, and existing pharmacy benefit managers were already pressuring these margins. With the rise of e-commerce, there’s a risk of reduced pharmacy sales and overall decreased foot traffic, impacting sales of other products at Walgreens locations.
Walgreens is confronting disruptions akin to those that affected physical retailers with the advent of e-commerce. Although the company has a new CEO with a background in pharmacy benefit management, who might be equipped to tackle the margin issues, the persistent threat from direct-to-consumer and e-commerce innovations poses a long-term challenge to Walgreens’ growth.
This situation positions Walgreens as a potential value trap. As Warren Buffett aptly noted, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
