How One Company Lost Out to the PBMs

Walgreens does not set drug prices; the Insurance companies do. And there is the issue.

Insurance company’s contract the PBMs to negotiate with the pharmacy chains such as Walgreens or CVS. They establish the pricing contract on covered drugs and what portion those pharmacies get reimbursed in return servicing their customers.

Walgreens felt it did not need to sign with one of the three or four PBMs due to its size. It finally did sign with a PBM far to late in the industry after the other chains had already established themselves with a PBM. The PBMs control the industry in what one call a monopoly which the Gov. allowed.

It is a lengthy but interesting read . . .

“The Real Reason Walgreens Collapsed,” BIG, Matt Stoller

It’s not that Walgreens didn’t modernize or couldn’t compete with Amazon. The 124-year-old company is being squeezed to death by monopolistic pharmacy benefit managers. Or the popular acronym PBMs.

I enjoy Scott Galloway’s popular podcast Prof G Markets, and I was listening to him and co-host Ed Elson discuss why the private equity giant Sycamore Partners – which specializes in squeezing blood out of failing retailers – is buying Walgreens for $10 billion. Walgreens is America’s second-largest drug store chain, and has been a public company for more than 100 years. “Going private,” particularly to a fund like Sycamore, is an admission of failure.

The trends for Walgreens aren’t good – it has closed a thousand stores since 2018 and plans to shut 1,200 more this year. And if you look at the gross operating income of the U.S. retail segment, it is collapsing.

What’s going on? Well that’s simple. Margins are falling apart.

Galloway and Elson went back and forth on why Walgreens is flailing. The company hasn’t modernized in the age of Amazon. It has too many stores. Bad management. A dumb acquisition of VillageMD in 2021. Etc. And these would seem like reasonable causes, since lots of other retailers are dying in the face of low-price competition.

But the real reason Walgreens, and the pharmacy business in general, is dying, is because of a failure to enforce antitrust laws against unfair business methods and illegal mergers. Elson touched on it when he mentioned lower reimbursement rates, but I don’t think people appreciate the full scope of what happened to Walgreens, and to the full pharmacy business in general. This is not a case of bad management; it’s a case of desperate management.

Let’s start by noting that on first blush, Walgreens should be fine. It’s a historic company, and a historically powerful one. In 1901, pharmacist Charles Walgreen created the first Walgreens store, and he was an aggressive and entrepreneurial founder. He did some of his own drug manufacturing and quickly expanded Walgreens to 100 stores within 25 years. The chain invented the malted milkshake in 1922, and that decade it took advantage of prohibition by selling “medicinal” alcohol. It was also a powerful chain store, not as dominant as A&P, but part of the set of firms that decade who fostered a powerful political backlash from local businesses.

But size does not translate into future success as Matt writes . . .

You’d think Walgreens would be doing fine. But it’s not. Read on.