Walgreens 2013 Annual Report Download - page 22

Affordable Care Act (the ACA). The ACA seeks to reduce federal spending by altering
the Medicaid reimbursement formula (AMP) for multi-source drugs, and when
implemented, is expected to reduce Medicaid reimbursements. State Medicaid
programs are also expected to continue to seek reductions in reimbursements
independent of AMP. We continuously face reimbursement pressure from pharmacy
benefit management (PBM) companies, health maintenance organizations, managed
care organizations and other commercial third party payers; our agreements with these
payers are regularly subject to expiration, termination or renegotiation. In addition,
plan changes typically occur in January and in fiscal 2013, the high rate of introduction
of new generic drugs moderated the impact of any associated rate adjustments.
We anticipate a significantly lower rate of introduction of new generics in the
second quarter of fiscal 2014.
On July 19, 2012, Walgreens and Express Scripts announced their entry into a new
multi-year agreement pursuant to which Walgreens began participating in the broadest
Express Scripts retail pharmacy provider network available to Express Scripts clients as
of September 15, 2012. From January 1, 2012, until September 14, 2012, however,
Express Scripts’ network did not include Walgreens pharmacies. The positive impact
of this agreement generally has been incremental over time since September 15, 2012.
While we cannot predict with certainty which Express Scripts clients will choose to
include us in their pharmacy networks in any particular future period, we expect that
our pharmacies will participate in the pharmacy networks of most clients for which
Express Scripts serves as pharmacy benefit manager. However, one substantial client
of Express Scripts, the United States Department of Defense TRICARE program,
announced that Walgreens will continue to not be a part of its pharmacy network and
will be designated as a non-network pharmacy provider for TRICARE beneficiaries.
Most of the patients we served in calendar 2011 who participated in a plan for which
Express Scripts served as pharmacy benefit manager transitioned to another pharmacy
after we exited the Express Scripts network on January 1, 2012. We have incurred
marketing and other costs in connection with efforts to regain former patients and
attract new patients covered by plans for which we became a network pharmacy
provider as a result of our agreement with Express Scripts.
Rejoining the Express Scripts retail pharmacy provider network has positively
affected our net sales, net earnings and cash flows over time relative to the levels
we otherwise would have achieved if we were not in the Express Scripts network
and partially mitigated the adverse effects related to our non-participation in the
Express Scripts retail pharmacy provider network during the period from January 1,
2012, through September 14, 2012. See “Cautionary Note Regarding Forward-
Looking Statements” below.
On May 13, 2013, we announced a multi-year extension of our agreement to serve
as a network pharmacy provider in the CVS Caremark pharmacy benefit manage-
ment national retail network.
Periodically, we make strategic acquisitions and investments that fit our long-term
growth objectives. Consideration is given to retail, health and well-being enterprises
and other potential acquisitions and investments that provide unique opportunities
and fit our business objectives. In fiscal 2013, we acquired Stephen L. LaFrance
Holdings, Inc. (USA Drug), which includes 141 drugstore locations operating under
the USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse names.
Additionally, we acquired an 80% interest in Cystic Fibrosis Foundation Pharmacy
LLC. This investment provides joint ownership in a specialty pharmacy for cystic
fibrosis patients and their families in addition to providing new product launch support
and call center services for drug manufacturers. Significant acquisitions in fiscal
2012 included assets of BioScrip Inc.’s (BioScrip) community specialty pharmacies,
centralized specialty and mail services pharmacy business and Crescent Pharmacy
Holdings, LLC (Crescent). In September 2013, we entered into an agreement to
acquire certain assets of Kerr Drug. The acquisition includes 76 retail drugstores,
as well as a specialty pharmacy business and a distribution center, all based in
North Carolina. The transaction is subject to customary closing conditions, and is
expected to close in calendar 2013.
In August 2012, we acquired a 45% equity interest in Alliance Boots and a call
option that provides Walgreens the right, but not the obligation, to purchase the
remaining 55% over a six-month period beginning February 2, 2015. Additional
information regarding our investment in Alliance Boots is available in our Current
Reports on Form 8-K filed on June 19, 2012, and August 6, 2012 (as amended by
the Form 8-K/A filed on September 10, 2012). The amendment to our August 6, 2012
The following discussion and analysis of our financial condition and results of
operations should be read together with the financial statements and the related
notes included elsewhere herein. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those discussed in forward-looking statements. Factors that
might cause a difference include, but are not limited to, those discussed under
“Cautionary Note Regarding Forward-Looking Statements” below and in Item 1A
(Risk Factors) in our Annual Report on Form 10-K. References herein to
“Walgreens,” the “Company,” “we,” “us” or “our” refer to Walgreen Co. and
its subsidiaries included in the consolidated financial statements and do not
include unconsolidated partially owned entities, such as Alliance Boots GmbH,
of which we own 45% of the outstanding share capital, except as otherwise
indicated or the context otherwise requires.
Introduction
Walgreens is principally a retail drugstore chain that sells prescription and non-
prescription drugs and general merchandise. General merchandise includes, among
other things, household items, convenience and fresh foods, personal care, beauty
care, photofinishing and candy. Prescription drugs represent the Company’s largest
product class, followed by general merchandise and non-prescription drugs. In fiscal
2013, fiscal 2012 and fiscal 2011, prescription drugs represented 63%, 63% and
65% of total sales, respectively, general merchandise represented 27%, 25% and
25% of total sales, respectively, and non-prescription drugs represented 10%, 12%
and 10% of total sales, respectively. The Company offers customers the choice to
have prescriptions filled at its retail pharmacies, as well as through the mail, and
customers may also place orders by phone or online including through the Company’s
mobile application. All Company sales during the last three fiscal years occurred
within the United States, Puerto Rico and Guam. There were no export sales.
At August 31, 2013, we operated 8,582 locations in 50 states, the District of Columbia,
Guam and Puerto Rico. Total locations do not include 398 Healthcare Clinics that
are operated primarily within other Walgreens locations or locations of unconsolidated
partially owned entities such as Alliance Boots GmbH (Alliance Boots).
Number of Locations
Location Type 2013 2012 2011
Drugstores 8,116 7,930 7,761
Worksite Health and Wellness Centers 371 366 355
Infusion and Respiratory Services Facilities 82 76 83
Specialty Pharmacies 11 11 9
Mail Service Facilities 2 2 2
Total 8,582 8,385 8,210
The drugstore industry remains highly competitive where we compete with other
drugstore chains, independent drugstores and mail order prescription providers.
We also compete with various other retailers including grocery stores, convenience
stores, mass merchants, online pharmacies, warehouse clubs and dollar stores.
Our sales, gross profit margin and gross profit dollars are impacted by, among other
things, both the percentage of prescriptions that we fill that are generic and the rate
at which new generic drugs are introduced to the market. In general, generic versions
of drugs generate lower total sales dollars per prescription, but higher gross profit
margins and gross profit dollars, as compared with patent-protected brand name
drugs. The positive impact on gross profit margins and gross profit dollars typically
has been significant in the first several months after a generic version of a drug is
first allowed to compete with the branded version, which is generally referred to as
a “generic conversion.” In any given year, the number of major brand name drugs
that undergo a conversion from branded to generic status can increase or decrease,
which can have a significant impact on our sales, gross profit margins and gross
profit dollars. Because any number of factors outside of our control or ability to
foresee can affect timing for a generic conversion, we face substantial uncertainty
in predicting when such conversions will occur and what effect they will have on
particular future periods.
The long-term outlook for prescription utilization is strong due in part to the aging
population, the increasing utilization of generic drugs, the continued development
of innovative drugs that improve quality of life and control healthcare costs, and
the expansion of healthcare insurance coverage under the Patient Protection and
Management’s Discussion and Analysis of Results of Operations
and Financial Condition
20 2013 Walgreens Annual Report