Walgreens is facing significant challenges in its primary care strategy.
In 2021, the company acquired a majority stake in VillageMD through a $5.2 billion deal, but it is now reconsidering that strategy — mirroring other large chains' struggle to break into primary care. According to an Aug. 7 Securities and Exchange Commission filing, Walgreens is evaluating options for VillageMD, including a potential sale of all or part of its stake, as well as restructuring alternatives.
Walgreens is evaluating options for VillageMD, including a potential sale of all or part of its stake, as well as restructuring alternatives.
Walgreens is "currently evaluating a variety of options with respect to VillageMD in light of ongoing investments by the company in VillageMD’s businesses and VillageMD’s substantial ongoing and expected future cash requirement," the filing said, adding that the options could include the sale of "all or part" of VillageMD, as well as possible restructuring options.
The Walgreens filing highlighted ongoing cash demands from VillageMD as a key issue. Walgreens has already begun reducing its involvement, announcing in June that it plans to cut back its stake in VillageMD. In a June 27 earnings call, Walgreens Boots Alliance CEO Tim Wentworth cited changing customer demographics and preferences as driving the shift, noting that 75% of Walgreens’ 8,600 stores generate nearly all of its retail profits.
This decision comes amid clinic closures across multiple states. In October, Walgreens announced in its fiscal fourth-quarter earnings report that it will close 1,200 locations over the next three years. The closures include 500 in 2025, which should immediately support adjusted earnings and free cash flow. The closures also encompass 300 stores slated for shutdown under a previous cost-cutting initiative.
Financially, Walgreens posted a $978 million operating loss in Q4 2024 — a 117% increase year-over-year. Net losses jumped to $3 billion, compared to $180 million the year prior
In an earnings call on Oct. 15 transcribed by Seeking Alpha, Mr. Wentworth said the closures will give the company a "healthier store base" and "will enable us to respond to shifts in consumer behavior and buying preferences."
According to the call, Walgreens exceeded its goal of cutting $1 billion in costs during fiscal 2024. This was achieved through store closures, layoffs and leveraging AI for supply chain efficiencies. However, a significant portion of its $13.2 billion operating loss stemmed from a $12.4 billion non-cash impairment charge tied to VillageMD’s goodwill.
VillageMD’s challenges have been mounting. VillageMD has made plans to pull out of several markets in 2024, exiting Illinois, Indiana, Florida, and plans to leave Nevada by the end of the year. Six clinics in Illinois closed on April 19; 40 clinics in Florida closed in March; 12 clinics in Indiana closed earlier this year; and six clinics in Nevada are slated to close by year-end.
"As we prioritize creating value and enhancing our liquidity position, [Walgreens] has entered into an agreement with VillageMD that provides additional runway to continue active engagement with VillageMD’s stakeholders and other third parties to evaluate a variety of options that will position it for sustainable growth," a Walgreens spokesperson said in an Aug. 8 statement shared with Becker's. "[Walgreens] is fully supportive of VillageMD as we work collaboratively with VillageMD leadership toward a solution with no changes to day-to-day operations for doctors or practice operations."
VillageMD's value-based care model includes a fixed fee per patient, but it requires substantial patient resources, which Walgreens lacks, according to a July report from the The Wall Street Journal. Another roadblock for Walgreens is that it doesn't have an integrated insurance company, unlike CVS' Aetna.
Initially, Walgreens planned to co-locate hundreds of VillageMD clinics within its stores. By 2023, more than 200 such clinics had opened, but scaling efforts stalled. Physical space constraints and recruitment challenges hampered growth. Larger health systems, offering better compensation and benefits, have made it difficult for VillageMD to attract physicians.
VillageMD's inability to meet patient quotas has also been problematic. While typical primary care doctors manage panels of 2,500 or more patients, Walgreens has not disclosed its patient volumes. Moving forward, VillageMD plans to focus on increasing patient density in key markets and optimizing its clinic footprint by exiting nonstrategic locations.
VillageMD has also seen leadership shakeups. Most recently, VillageMD's board appointed COO Jim Murray as interim CEO Nov. 27 after former CEO Tim Barry stepped down.
The closures also mirror larger issues for the pharmacy industry — financial pressures are one of the leading reasons behind the mass retail pharmacy closures. As pharmacy benefit managers and insurance companies continue to reduce reimbursements for prescriptions, many pharmacies are finding it difficult to maintain profitability.