New owner plans to take the pharmacy company private as it continues to shutter retail locations
Last year, Walgreens announced plans to close a large number of its stores “due to financial difficulties and ongoing environmental pressures,” according to Becker’s Hospital Review. Dark Daily has covered the struggles facing all of the major pharmacy companies in many ebriefs over the past few years.
Now, in another sign of the financial woes facing retail pharmacy chains, Walgreens Boots Alliance (WBA) announced in March that it had agreed to be acquired by private equity firm Sycamore Partners. As part of the $10 billion deal, Sycamore will take WBA private, according to a company press release.
The sale is valued at up to $23.7 billion when debt is included. The company’s brands include Walgreens and Duane Reade in the US, and Boots in the UK.
The deal follows WBA’s plans to close approximately 1,200 US retail locations over the next 30 months. The pharmacy company announced the plan last October as it reported an $8.6 billion net loss for the 2024 fiscal year.
“You have a business that is shrinking, and then you layer on losses and cash burn, all of that was the perfect recipe for what we are seeing today,” Jefferies research analyst Brian Tanquilut told Reuters following the March announcement.
WBA said the deal is expected to close in Q4 of calendar year 2025, pending approval by regulators and its shareholders. The agreement includes a “go-shop” provision that allows the company to consider other proposals.
“Given the size and number of moving parts involved—a potential split of the US business, Boots, and Health—we don’t expect a competing bid to come over the top,” Leerink Partners analyst Michael Cherny told Reuters.
“Sycamore will provide us with the expertise and experience of a partner with a strong track record of successful retail turnarounds,” said Walgreens Boots Alliance CEO Tim Wentworth (above) in a press release. “We believe this agreement provides shareholders premium cash value, with the ability to benefit from additional value creation going forward from monetization of the VillageMD businesses.” (Photo copyright: Walgreens Boot Alliance.)
Long Way Down for Walgreens Boots Alliance
The purchase price of this sale demonstrates how far WBA has fallen since its formation in 2014, when Walgreen Co. completed a merger with Alliance Boots GmbH, a large retail group headquartered in Switzerland.
At its peak in April 2015, WBA had a market valuation of more than $100 billion, according to financial reports.
Analysts have pointed to industrywide challenges that have also affected rivals CVS and Rite Aid, according to reports in The New York Times and the Associated Press (AP). These include rising operating costs, declining reimbursement for prescription drugs, and stiff competition from discount retailers such as Amazon and Walmart.
“We are at a point where the current pharmacy model is not sustainable, and the challenges in our operating environment require we approach the market differently,” said WBA CEO Tim Wentworth during a June 2024 call with analysts, the AP reported.
News Outlets Report Questionable Moves Over the Years
Reuters, however, pointed to questionable moves by Stefano Pessina, the former executive chairman of Alliance Boots who became CEO of WBA following completion of the merger in 2014. Pessina is also WBA’s largest shareholder, Reuters noted.
In October 2015, WBA offered $9.5 billion to acquire US pharmacy chain Rite Aid. But the company eventually backed away from the deal as regulators raised antitrust concerns, CNBC reported. Instead, in 2017, WBA paid $4.375 billion to acquire nearly 2,000 of Rite Aid’s 4,600 US retail locations.
“But that store footprint proved too big and soon after the acquisition, Walgreens started to close locations,” Reuters reported.
Billions Spent on Retail Clinic Plans
In July 2020, WBA announced a $1 billion deal with VillageMD to open as many as 700 primary care clinics at Walgreens locations. That deal gave WBA a 30% ownership stake in the provider.
Nine months later, Pessina stepped down as CEO to become executive chairman of the board. Taking his place was former Starbucks chief operating officer Roz Brewer. Under her watch, WBA spent an additional $5.2 billion to take a majority stake in VillageMD, which provides primary care services.
That deal has become a “cash drain,” on WBA, Reuters reported. CNBC noted that other retailers have also faced headwinds in their efforts to provide primary care services. Walmart said it would close its in-store health clinics, and CVS also shuttered dozens of clinics in New England and Southern California.
In March 2024, Wentworth revealed a turnaround plan that included $1 billion in cost cuts and closure of 160 VillageMD clinics, according to Fierce Healthcare. At the time, the company had already closed hundreds of stores in the US and UK, AP reported.
Wentworth followed that plan with October’s announcement to shutter an additional 1,200 retail locations.
Mizuho Bank analyst Ann Hynes told Reuters that, as a private company, WBA will be better positioned to deal with its challenges because it won’t have to answer to shareholders.
One likely move is a divestment of the company’s stake in VillageMD, Reuters reported. And the Boots portion of WBA’s business is a likely spinoff candidate, analysts told the news outlet.
Switching from non-profit to for-profit may affect how clinical laboratories operate in the new healthcare system
Shifting away from fee-for-service payment models and towards value-based healthcare is the goal of many non-profit hospital systems. One such transformation is underway at Summa Health, one of the largest integrated delivery networks (IDNs) in Ohio. On January 17, venture capital firm General Catalyst announced that its subsidiary—Health Assurance Transformation Corporation (HATCo)—had entered into an agreement to purchase Summa Health.
“HATCo’s investment into Summa Health will drive not only near-term benefit to the organization and the patients it serves but also sustainable, long-term transformation through a true shift to value-based care and access to new revenue streams, resources, innovations, and technologies,” states a General Catalyst news release penned by Marc Harrison, MD, CEO of HATCo.
Harrison was formerly President and CEO of Intermountain Healthcare, a 33 hospital not-for-profit IDN in Salt Lake City, Utah. This is a noteworthy fact because Intermountain Health has a national reputation as an innovative multi-hospital health system. Some observers believe that Harrison’s involvement signals that General Catalyst believes it has a care model that can deliver better patient care in a profitable manner.
“Under its new structure, Summa will become a for-profit organization, and General Catalyst says it will introduce new tech-enabled solutions that aim to make care more accessible and affordable,” CNBCreported.
“This is the first time that anybody has done anything quite like this,” Harrison told CNBC. “There are many digital health solutions that are out there as point solutions. This is the first holistic transformation of a health system to a thoughtful combination of digital and in-person care.”
“Our intent is to build on and augment the system’s considerable strengths. First and foremost, we share Summa Health’s commitment to serving all members of the community,” wrote HATCo CEO Marc Harrison, MD (above), in a news release. “The Summa Health team also shares our belief that achieving healthcare transformation will require a shift to value-based care … Together, we intend to demonstrate that a model that is better for patients can also be good for business, creating a blueprint for other health systems to effectively serve all people in their communities.” How this shift will affect Summa’s clinical laboratories remains to be seen. (Photo copyright: General Catalyst.)
Betting on Healthcare
In 2023, General Catalyst, an American venture capital firm headquartered in Cambridge, Mass., unveiled its Health Assurance Transformation Corporation (HATCo) and began shopping for a health system to buy.
HATCo has 20 healthcare systems in a network that spans 43 states and four countries, according to Healthcare Dive. The company’s news release states it has been focused on three areas since its start-up:
Helping its partners on their “transformation journeys.”
Planning to “acquire and operate a health system for the long-term.”
“The goal of the purchase is for the health system to act as a proving ground for General Catalyst to test ways to improve hospital operations and patient care, without risk aversion or cash shortfalls, management said,” Healthcare Dive reported.
Thus, the firm’s announcement to purchase a health system last October “sent shockwaves through the healthcare industry” according to Healthcare Dive.
“At its core, General Catalyst’s long-term Health Assurance thesis is that value-based care not only is good for patients, but also can be a successful business model if deployed with innovative technology at meaningful scale. Its rationale for buying a health system is a belief that it can improve on the traditional model of not-for-profit health system governance and management by embedding new incentives,” wrote Christopher Kerns, CEO and co-founder of Washington, D.C-based research firm Union Healthcare Insight, in a blog post analysis.
General Catalyst’s HATCo may offer up “a profit motive, a longer time horizon, and a channel for dozens of innovative companies to demonstrate value,” he noted.
“The single biggest barrier to promising young healthcare companies is an inability to scale. Many of their innovations—in digital health, patient engagement, revenue cycle workflow, etc.—require willing health system partners who are famously conservative in their investments and service providers, and rarely take risks on newbies. The addition of Summa provides an open laboratory for those innovations,” Kerns added.
Is the Summa Health Deal Good for Healthcare?
Some in the industry were taken aback by General Catalyst’s announcement.
“A lot of people feel like a PE (private equity) or venture capital company owning a hospital is kind of like asking Freddy Krueger to come babysit your kids. It just makes people a little nervous, and it doesn’t feel quite aligned with this concept of healthcare being a human right,” John Bass, CEO of Hashed Health, a Nashville, Tenn.-based healthcare venture studio, told CNBC.
Nevertheless, it’s a moot point. HATCo is moving forward with its purchase of Summa Health.
“For this bet to work, Summa will have to be a solid proving ground for [General Catalyst’s] portfolio companies. And that means either Summa itself will have to grow, or it will have to act as a force multiplier for its other value-based portfolio companies to justify the considerable capital expended. I have to say, that’s a tall order, but not an insane one,” said Kerns in the Union Healthcare Insight blog post.
Healthcare managers may find it interesting to follow HATCo and Summa Health on their planned journey. The results may speak for themselves. Either way, clinical laboratories and anatomic pathology group practices in HATCo’s health system may be in for some interesting changes.
Carilion Clinic and Novant Health will continue to own equity in the new clinical laboratory company
It was big news in the clinical laboratory industry yesterday when Spectrum Laboratory Network of Greensboro, North Carolina announced a merger with Carilion Labs of Roanoke, Virginia. The combined enterprise will have annual revenue of approximately $300 million and immediately becomes one of the nation’s larger clinical laboratory companies.
As announced by the parties involved, Carilion Clinic will hold a 33% ownership interest in the new laboratory company. Novant Health, which holds a minority interest in Spectrum Laboratory Network, will continue as an equity owner and will have a seat on the new board of directors, once the two laboratory organizations are merged into one company.
What is my lab worth? That’s the question every laboratory seller wants to know!
Despite an economy in recession, laboratory buyers remain bullish on the financial fortunes of clinical laboratories and anatomic pathology companies. The lack of publicly-announced acquisitions during 2009 masks the fact that lots of conversations are happening between lab buyers and lab owners.
Why such interest? On the buyer side, private equity companies and buyers are convinced that the demographics of the aging population translates into a robust demand for laboratory testing during the next decade. Further, they are enthusiastic about the potential for the steady introduction of powerful new diagnostic assays to further drive up lab test volume. They understand why patients and physicians will seek the benefits of higher sensitivity and improved accuracy from these new assays.
