Drugstore chain Walgreens is considering a full sale of its stake in VillageMD after investing billions in the primary care provider.
The company is currently evaluating a variety of options in light of ongoing investments and VillageMD’s "substantial ongoing and expected future cash requirements," Walgreens disclosed Wednesday in a filing with the U.S. Securities and Exchange Commission.
Walgreens said its exploring options including a sale of all or part of the VillageMD businesses, possible restructuring options and other strategic opportunities, according to the filing.
The disclosure signals a potential reversal of Walgreens' commitment three years ago to build out its healthcare provider business to expand beyond just pharmacy services.
The retail pharmacy giant invested $1 billion in VillageMD in 2020 and then sunk $5.2 billion into the primary care company in 2021, making it the majority owner. But the company is now scaling back VillageMD's footprint. Last fall, Walgreens announced plans to close 60 underperforming clinics and exit five markets as part of an aggressive $1 billion cost-saving strategy as it looks to boost profitability in its healthcare business.
VillageMD now plans to shutter 160 clinics, inclusive of the 60 that had been previously communicated, Walgreens CEO Tim Wentworth told investors during an earnings call in March.
The VillageMD business was impacted by “slower-than-expected trends in patient panel growth and multi-specialty productivity and recent changes in Medicare reimbursement models," Walgreens' global chief financial officer Manmohan Mahajan said during the earnings call.
The VillageMD portfolio includes urgent and primary care chain Summit Health-CityMD after VillageMD bought those assets in a deal worth close to $9 billion in 2022.
VillageMD is not yet profitable, and its waning value contributed to Walgreens' hefty $6 billion loss in the second quarter.
Walgreens executives said in June that the company would reduce its stake in VillageMD and will no longer its majority owner, but not eliminate it entirely.
"We believe in the future of these businesses [VillageMD, Summit Health and CityMD] and intend to remain an investor and partner, but as part of our persistent focus on value creation for Walgreens Boots Alliance, we are collaborating with leadership toward an endpoint to rapidly unlock liquidity, enhance optionality and position them for additional growth," Wentworth told investors on the company's third-quarter earnings call in June.
VillageMD also has not repaid its debt to Walgreens. The company gave the primary care clinic operator a $2.25 billion credit facility early last year. VillageMD has defaulted on the loan agreement, Walgreens disclosed in the regulatory filing.
The two companies entered into a forbearance agreement, and Walgreens has agreed not to "exercise remedies" against VillageMD. Walgreens also is "actively engaged in discussions with VillageMD’s stakeholders and other third parties with respect to the future of its investment in VillageMD," it wrote in the regulatory filing.
In the past four years and during the COVID-19 pandemic, many retailers had ambitions to expand their businesses into providing healthcare services. CVS bought Signify Health in 2022 for $8 billion and the same year Amazon announced it would buy One Medical for $3.9 billion. Walmart also began a robust expansion of its health clinics just to turn around and shutter all of them a few years later.
"There were retail moments to build out a footprint and to build more of a integrated health service; some of that has done well and some of that has not necessarily done well. I think we're coming back to what works and realistic valuations. I think there's been an overall change in the macro economy and there isn't as much free or low-cost capital to explore and incubate some of these things if they're not supporting their own organizations' revenue objectives," said Nathan Ray, who leads healthcare M&A at Chicago consulting firm West Monroe.
He added, "I think some platforms, particularly those focused on seniors, are probably doing better. I think those platforms that are more general are, anecdotally, performing differently. People are more likely to go back to their physical doctor and access the health system the way that they had been, rather than a wholesale jump to convenient care. It doesn't mean that retail models are going completely away. I think they need capital and time and an incubation strategy."
Walgreens' rival CVS Health, meanwhile, plans to grow its Oak Street senior-focused primary care health centers.
Oak Street Health now operates 207 centers, an increase of 30% from a year ago, CVS Health executives told investors during its second-quarter earnings call this week.
"Oak Street also significantly increased revenue in the quarter, growing approximately 32% compared to the same quarter last year, reflecting strong membership and growth," CVS Health Chief Financial Officer Tom Cowhey said during the call.
"Despite a challenging and dynamic operating environment in Medicare, we continue to see strong profitability of mature clinics and a consistent ramp in profitability of our newer clinics. We are encouraged by Oak Street's performance, which remains in line with our prior outlook, and remain committed to growing our center footprint and expanding access to this leading care model," Cowhey said.
The company plans to increase the number of health centers by another “50 to 60” in 2024, Forbes reported a year ago. CVS said in February it planned to nearly double the business to 300 clinics by 2026 and aimed to grow the number of Oak Street patients over time, Reuters reported.