Walgreens 2014 Annual Report Download - page 47

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. We also experienced a shift from historical
patterns of deflation in generic drug costs to inflation in fiscal 2014. During fiscal 2014, we experienced cost
increases on a subset of generic drugs and in some cases these increases have been significant. We expect this
generic inflation to continue in fiscal 2015.
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 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 with
rate adjustments often occur in January and our reimbursement arrangements may provide for rate adjustments at
prescribed intervals during their term. In fiscal 2013, the high rate of introduction of new generic drugs moderated
the impact of any associated rate adjustments. We experienced lower reimbursements and a significantly lower rate
of new generic introductions in fiscal 2014 as compared to the preceding fiscal year.
We anticipate new generic introductions to increase on a year over year basis in fiscal 2015. The current
environment of our pharmacy business also includes ongoing generic inflation, reimbursement pressure, and a
shift in pharmacy mix toward 90-day at retail. Our 90-day at retail offering is typically at a lower margin than
comparable 30-day prescriptions, but provides us the opportunity to increase business with patients with chronic
prescription needs while offering increased convenience, helping facilitate improved prescription adherence and
resulting in a lower cost to fill the 90-day prescription. In addition, because we decided to accept lower
reimbursement rates in order to secure preferred relationships with Medicare Part D plans serving senior patients
with significant pharmacy needs, our Medicare Part D reimbursement rates will decrease in calendar year
2015. We expect that these factors will have an adverse impact on gross profit dollar growth in our pharmacy
business in fiscal 2015.
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. 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.
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 2014, we acquired certain assets of Kerr Drug and its
affiliates, which include 76 retail drugstore locations, as well as a specialty pharmacy business and a distribution
center, all based in North Carolina. 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.
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