Dive Brief:
- Walgreens is considering a full sale of its stake in VillageMD, after pouring billions of dollars into the unprofitable primary care chain. The decision, disclosed Wednesday in a securities filing, is a sharp reversal to the pharmacy behemoth’s past commitment to building out its healthcare delivery offerings.
- Walgreens is “currently evaluating a variety of options” in light of VillageMD’s “substantial ongoing and expected future cash requirements,” the company said in the 8-K. “These options could include a sale of all or part of the VillageMD businesses, possible restructuring options and other strategic opportunities.”
- If Walgreens offloads VillageMD entirely, it would be a step up from management’s previous plans for the value-based medical chain. In June, Walgreens said it would reduce ownership in VillageMD but not eliminate it entirely.
Dive Insight:
Walgreens initially invested $1 billion in VillageMD in 2020 before doubling down with another $5.2 billion investment a year later, making Walgreens VillageMD’s majority owner. Walgreens then embarked on a series of M&A to grow VillageMD’s network of physician offices.
However, VillageMD wasn’t profitable, which for Walgreens — a company that entered healthcare delivery to try and bolster flagging operations in its core pharmacy business — quickly became unacceptable. Last year, Walgreens started closing VillageMD centers to try and get the business into the black.
That effort was unsuccessful: To date, VillageMD has yet to turn a profit on a nonadjusted basis. VillageMD’s waning value contributed to almost all of Walgreens’ $6 billion net loss in its second quarter results released in March.
Experts say Walgreens likely ran into the same issues as other retail giants that have tried to lean on their brick-and-mortar footprint to reach more Americans needing convenient primary care, including low reimbursement and staffing shortages.
VillageMD also hasn’t been able to repay its debt to the Illinois-based retailer. According to the filing, Walgreens gave the primary care company an almost $2.3 billion credit facility early last year, but VillageMD has defaulted on its responsibilities under the loan agreement.
On Tuesday, Walgreens and VillageMD entered into a forbearance agreement wherein Walgreens has agreed not to “exercise remedies” against VillageMD. Walgreens is also “actively engaged in discussions with VillageMD’s stakeholders and other third parties with respect to the future of its investment,” according to the filing.
Walgreens did not respond to a request for comment on what stakeholders or third parties have expressed interest in taking on Walgreens’ investment.
As part of Walgreens’ strategic course reversal on health services, the company has offloaded other healthcare assets including stakes in home infusion provider Option Care Health and drug distributor Cencora. Walgreens has also recently laid off employees and shared plans to close a significant number of underperforming stores in the U.S.
Walgreens’ stock has fallen more than 59% year to date.
