The Hard New Reality of Retail Pharmacy
Retail pharmacy is facing a tough reality. Communities at risk of being underserved and landlords of Main and Main locations with high-credit tenants are feeling the impact. In Q2 2024, 408 single-tenant Walgreens locations were on the market. The lowest cap rate is for a “trophy” location in Miami, FL, at 3.67% for $9,000,000. It has been on the market for a year. The highest cap rate is for a store in Hot Springs, AR, at 9.79%. Cap rates are expected to rise further this year.
Independent Retail Pharmacies at Risk
Pharmacies are facing unprecedented financial challenges—nearly a third of independent stores are at risk of closing through 2024. The National Community Pharmacists Association (NCPA) links this to a new CMS rule reducing prescription reimbursements. NCPA CEO B. Douglas Hoey warns that without congressional action, many local pharmacies may close, leaving millions without access to services.
Walgreens’ Financial Struggles
The big three retail pharmacies—Walgreens, Rite Aid, and CVS—are not immune to these changes and new risks. S&P Global Ratings downgraded Walgreens Boots Alliance to “BB” from “BBB-“, classifying its debt as “speculative grade.” Walgreens is struggling in both its retail and pharmacy operations, facing declining margins due to reimbursement pressures and reduced sales volume. Analysts predict a decline in Walgreens’ EBITDA margin to below 5% this fiscal year, compared to 6% last year. The company also faces significant debt maturities, with $1.4 billion due in November, $2.8 billion in fiscal 2026, and $1.8 billion in fiscal 2027. Walgreens is consolidating cash as a precaution against refinancing challenges.
S&P analysts Iyer and Zhang said they continue to see the VillageMD banner as “a significant drag on profitability due to the rising cost of labor, pressures from reimbursement, and lower volumes.” Walgreens’ acquisition streak led the S&P analysts to believe that it would divest of its Boots U.K. business, which could have helped pay down $8 billion to $10 billion in debt. But the company called off the idea about two years ago.
“We believe these frequent and large changes to the company’s strategic plans diminish management’s credibility to execute a sustainable and cohesive operating model for Walgreens in both the near and long term,” Iyer and Zhang said.
The Role of Pharmacy Benefit Managers
Pharmacy benefit managers (PBMs), third-party administrators managing prescription drug benefits, have become controversial figures in the healthcare industry. Initially created to process insurance claims, PBMs now manage pharmacy networks, set drug formularies, determine co-pays, and establish criteria for prior authorizations. The three largest PBMs—CVS Caremark, Express Scripts, and OptumRx—dominate 80% of the U.S. market.
Negative Impact of PBMs on Costs
PBMs face criticism for inflating overall costs while claiming to save money. They profit from manufacturer rebates, the difference between billed insurance and reimbursed pharmacy amounts, and their own pharmacies, benefiting from forced mail-order purchases. PBMs also reimburse their pharmacies more than independent ones, adding financial strain on smaller community pharmacies. Annually, PBMs generate over $315 billion in revenue by inflating prescription costs.
In 2011, Walgreens sold its pharmacy benefit management business, Walgreens Health Initiatives, to Catalyst Health Solutions for $525 million.
New Pharmacy Rules and Fees
CMS’s 2014 definition of “negotiated price” allowed PBMs to create “pay for performance” programs. These programs led to significant Direct and Indirect Remuneration (DIR) fees collected from retail pharmacies. These fees often exceed total pharmacy reimbursement, forcing pharmacies to pay PBMs more than they earn from dispensing prescriptions. This has worsened financial difficulties for many pharmacies and highlights the need for regulatory reform.
Retail Pharmacy’s Future
The combination of reduced reimbursements, changes to PBM practices, and significant debt burdens poses a severe threat to both independent pharmacies and large chains like Walgreens. It’s worth noting that these changes were enacted as part of the Affordable Care Act, and proposed changes to that law have been contentious. Without immediate legislative intervention and regulatory reforms, the retail pharmacy landscape could see substantial closures, significantly impacting patient access to essential pharmacy services.
