The Threat Posed by Amazon
Traditionally, pharmacies were considered impervious to the rise of e-commerce due to the immediacy required for prescription fulfillment. However, Amazon has shattered this notion by launching a same-day pharmacy service that is rapidly expanding across major U.S. cities. The convenience of free same-day delivery for Prime members and the futuristic concept of drone delivery in some regions could potentially entice customers away from traditional brick-and-mortar pharmacies, like Walgreens, at a critical juncture.
Challenges and Opportunities for Walgreens
Walgreens faces a dual dilemma of unprecedented drug reimbursement pressures and the encroaching threat from Amazon. Pharmacy Benefit Managers (PBMs) have exacerbated the reimbursement issue to the extent that certain prescriptions drive pharmacies into financial loss territory. To combat this, Walgreens is advocating for a new cost-plus model, while the U.S. government is scrutinizing PBMs for inflating drug prices, particularly for insulin.
While these hurdles loom large, Walgreens investors can take solace in the company’s dramatically reduced valuation. Currently trading at a forward price-to-earnings ratio of just over 4.5 times earnings based on analyst estimates, coupled with a similar enterprise value-to-EBITDA multiple, the stock presents a potential recovery play. Additionally, divesting unprofitable stores and shedding underperforming ventures like VillageMD could inject a much-needed boost to Walgreens’ bottom line.
In Closing
Despite the formidable challenges posed by Amazon’s disruptive foray into same-day pharmacy services, a calculated bet on Walgreens could yield significant returns. A favorable ruling against PBMs could ignite a positive trajectory for the company, making it a speculative buy for investors with an appetite for risk. As the saga between traditional pharmacies and e-commerce behemoths unfolds, the battleground is set for an epic clash where only the most resilient will emerge victorious.
