It's a good time to be in the pharmacy business — just ask Walgreen Co. Despite the recession, the $59 billion drugstore chain is on pace to grow its revenues by 7% in fiscal 2009 (down from 9.8% growth a year ago). While other companies were cutting their dividends, Walgreen raised its own in July, for the 34th consecutive year. In spite of reports of people being forced to economize on their medications, it seems the prescription business retains a recession-proof quality.
But Walgreen isn't standing pat. The company is giving the general-merchandise part of its nearly 7,000 drugstores a makeover, featuring shopper-friendlier shelves and broader selection. More audaciously, Walgreen is setting up walk-in health-care clinics in its drugstores and in companies across the country. More than 700 have been launched so far, and, in the long term, hundreds more are anticipated. (Recently, the company launched a direct pharmacy-benefit purchasing arrangement with Caterpillar.)
Walgreen has also dramatically revamped its management ranks. Since naming Wade D. Miquelon as CFO in May 2008, the company has hired a new CEO, chief marketing officer, chief merchant, and head of health-care services. A veteran of Tyson Foods and Procter & Gamble, the 44-year-old Miquelon recently discussed Walgreen's ever-expanding presence in the nation's health-care system.
Your results suggest that times aren't so bad in the pharmacy world.
We're not recession-proof, but we have recession resistance. Our prescription business is still pretty strong. We see the economic impact much more in the front of the store — everything but the pharmacy, about a third of our business. People are buying a lot fewer discretionary items and a lot more staples. They're buying more private-label and less branded merchandise. And they're using cash and debit cards more and credit cards much less.
Despite your solid sales, Walgreen intends to slow its annual new-store growth to about 3% in 2010. Why?
For a long time we were growing our store base at about 9%, which is about one store every 17 hours. And we were taxing the organization. We were spending so much time trying to open new stores that we weren't spending enough time on our single greatest value-creation lever: the ability to make our current stores more productive. We can build 7,000 more stores, or we can make our 7,000 [existing] stores more productive. I would argue that with less capital, the place to start is building on these great assets that we have.
How will demographic and health-care trends affect your business?
The population is aging, and as people age they need not only more prescriptions but also more over-the-counter products. So that's a very good trend for us. There are about 40 million baby boomers entering the senior market over the next decade. Another trend is toward more affordable and accessible health care. We're well positioned there.
A third trend is toward better outcomes — how to get the best outcome at the best cost. For every dollar spent on health care today, about 13 cents is spent on pharmaceuticals in total. A penny to a penny-and-a-half is gross profit for pharmacy. The [net] profit is significantly less than that. Then you have maybe a penny for managed care and PBMs [pharmacy benefit managers] to take their cut, 2 cents for generic-drug costs, and 7 or 8 cents for branded drugs. All told, this 13 cents represents the biggest opportunity to reduce the other 87 cents of the health-care dollar, because there's widespread acknowledgment that the cheapest way to lower overall health-care costs is better compliance [with prescription medications].
Because better compliance reduces the need for more-expensive treatment, like surgery?
Yes. When people with chronic conditions go off their medicines, that's when you get into the very big dollars. For example, average compliance in diabetes medications is only in the 40th percentile. But if you could have compliance at a much higher level, over the life of a [patient] you could reduce the medical cost per year by thousands of dollars.
This summer there was a dispute between Walgreen and the state of Delaware over Medicaid reimbursements. Walgreen complained that what the state wanted to pay for branded drugs wouldn't cover the company's costs. Have you reached a compromise?
I don't know if it's a compromise, but we've reached a point where we're working together. If we're going to buy a drug from a brand manufacturer for $60, how can we sell it to a Medicaid patient for $50? We just can't. What we have suggested is that if they make generic substitutions in their formulary in certain cases, we can save them more money in total.
Do you see this kind of dispute happening with other Medicaid programs as the states struggle to make ends meet?
We've always had this issue, but I think the states realize that the gross profit margins for pharmacy are not big. That penny-to-a-penny-and-a-half I mentioned? If you squeeze that by even a tenth of a penny, you'd put many pharmacies out of business.
Walgreen has plenty of competition these days: other drugstore chains, Wal-Mart, groceries, mail order, Internet sales. How are you responding?
If we offer the best customer experience, we can continue to build share. We're channel agnostic, so we have a mail business; we're happy to do mail. We have a strong, growing online business. We run lots of hospital pharmacies, lots of work-site pharmacies. It's like [when we started] our drive-thru pharmacies: people said that was heresy — how could you not have someone come into the store and get the script and maybe buy something else, too? But at the end of the day, it was another channel that the consumer wanted.
You're also making a big push into health care by opening retail and corporate clinics.
We have about 720 clinics. CVS has slightly more retail clinics, but in terms of total clinics we're the largest by far. We're on 400 corporate work sites; a lot them are Fortune 500 companies. I think this is the model of the future, given all of the stress on health care and the need to cut costs. You shouldn't have a child with pink-eye going to the emergency room. [The clinic is] convenient; you can walk in off the street. It's affordable; most insurance covers it. Most clinic services range in cost from $59 to $74. And if our nurse practitioner isn't qualified to treat a patient, we do referrals very quickly, to a doctor, emergency room, or whatever is required.
Would universal health care affect this strategy?
I don't think so, because what we have in the United States is not only an affordability issue but an access issue. We have 68,000 health-care professionals in the company — pharmacists and pharmacy technicians, nurse practitioners and doctors — at 7,000 points of care. We have them in pharmacies, hospitals, corporate campuses, home environments. Using this very affordable network to help people manage outcomes could really help transform how we think about that first layer of health care in America.