Settlement Turns Walgreens Into A Monster
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What's going on? And can Walgreen keep it up?
The PBM Dispute
ExpressScripts is a Pharmacy Benefit Manager, or PBM, and the country's largest. It acts as a gatekeeper between the insurance industry and drug benefits. If you're not in a PBM, it's tough to run a pharmacy.
Yet Walgreen was willing to do just that for months. This did some serious damage to the stock, sending it from nearly $45 per share down to about $30, when a new agreement was finally reached.
CVS, which owns its own PBM, Caremark, was the prime beneficiary of this. When the dispute began in July 2011, CVS shares began moving upward. If you sold Walgreens and bought CVS at that point, you would still be well ahead.
So, to a great extent, all that we've seen since last July is Walgreen catching up to its pre-dispute level. But at its present price, Walgreen is actually $5 per share above those 2011 highs. The question for investors is, where do the stocks go from here?
A New Business Model
The key to success going forward is a new business model, one that CVS pioneered but Walgreen has committed to.
Both companies have in-store clinics at some locations. CVS calls its Minute Clinics-Walgreen calls its Take Care Clinics. Both are staffed by nurse-practitioners and make extensive use of electronic health records, with physicians providing back-up on an as-needed basis.
These kinds of clinics are key to managing the enormous, and growing, shortage of primary care physicians. The physicians' lobbying arm, the American Association of Family Physicians, has been pounding the table on this issue for years, saying a current shortage of 16,000 such physicians will become 25,000 by 2025 unless there is drastic action.
Of course, a shortage can also be an opportunity, if you work it right.
CVS Holds Back, Walgreens Charges Forward
CVS' problem here may be Caremark, which was its big advantage during the ExpressScripts-Walgreen dispute.
As a Pharmacy Benefit Manager, Caremark is closely tied to existing business models in medicine. If CVS pharmacies did much more than fix sprains and give shots, its Caremark customers might revolt.
Walgreen is under no such restriction, so it has taken the route of both diagnosing and treating chronic diseases, like diabetes and heart disease. This puts it not only ahead of CVS, but ahead of other rivals with in-store clinics, like Target and Wal-Mart.
Walgreen now says it will put physicians assistants and nurse practitioners, who aren't doctors but can have prescribing power, into 300 clinics in 18 states. They will be able to both diagnose these chronic conditions and offer treatment. Hospitals and Health Networks notes that this represents 80% of the U.S. health care market.
Ishani Ganguli, writing at The Health Care Blog , says Walgreen now has an opportunity to create alliances with specialists who can enhance its offering, perhaps making it an Accountable Care Organization, or ACO. ACOs get a fixed per-patient price from insurers, either for wellness or case management, and thus have an incentive to keep patients out of the hospital that fee-for-service groups don't.
The bottom line here is that Walgreen has found the “sweet spot” in the health care market, the biggest source of revenue, the area everyone claims is driving health care costs upward, and it has a data-driven system, limiting expensive doctor participation, that can save enormous amounts of money for patients and insurers, while making enormous profits for itself.
Walgreen should be on your buy list.
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Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!