Following years of monetary instability, Walgreens has recently declared that it has finalized a $10 billion takeover agreement with private equity company Sycamore — a transaction that is 10 times more significant than the typical “large” private equity transaction of $500 million yet is only 8% above its existing trading valuation, as stated by Peter Boumgarden, the Koch Family Professor of Practice in Family Enterprise at Olin Business School at Washington University in St. Louis.
“This modest premium on the final sales figure compared to its trading value indicates the substantial challenges facing the pharmacy sector. Specifically for Walgreens, the final figure demonstrates a considerable decline from a $100 billion appraisal just ten years prior,” Boumgarden remarked.
Walgreens’ difficulties are by no means singular. In recent years, CVS has shuttered 900 locations nationwide and intends to close an additional 270 in 2025. Rite Aid only emerged from bankruptcy after shutting down 800 stores and going private. Meanwhile, nearly one-third of smaller, independent pharmacies are projected to face closure within the coming year, according to Patrick Aguilar, MD, managing director of WashU Olin’s Health Initiative.
“Operating pharmacies is a complicated endeavor. Factors such as high staff turnover, unfavorable payment structures, and evolving consumer behaviors have led to a decline in pharmacy profitability over the past decade,” Aguilar noted.
“Nonetheless, pharmacists serve an essential function within the American healthcare framework,” he continued. “They provide specialized support to patients with intricate needs, safeguard against medical mistakes, and advise patients to avoid unintended interactions. This proficiency is crucial for patient health and safety.”
Will Sycamore manage to steer Walgreens towards stability? What are the potential long- and short-term effects for Walgreens staff, customers, and the industry at large? Below, Aguilar and Boumgarden provide insights into these inquiries.
Why are pharmacies encountering difficulties?
“The rise of pharmacy benefit managers (PBMs) has profoundly altered the landscape for pharmacies in recent times,” Aguilar explained. “While PBMs offer advantages to payers and facilitate stricter negotiations on drug prices, they also impose additional expenses on pharmacies. Mail-order services have also emerged as a convenient option for consumers to receive their prescriptions at home. This is highly convenient for consumers; however, these services predominantly apply to medications that are less time-consuming for pharmacies to fulfill. Consequently, retail pharmacies are now confronted with more intricate, labor-intensive prescriptions precisely when they are losing margins amid tougher price negotiations.
“Likewise, various pharmacies, such as Walgreens, have historically derived a portion of their revenue from nonpharmaceutical sales within the store. As Amazon and similar entities have increasingly become the preferred suppliers for consumers seeking daily necessities, in-store sales have significantly suffered. This creates a perfect storm in which businesses like Walgreens find it challenging to sustain profitability.
“Lastly, the pharmacy workforce faces considerable challenges as pharmacy schools struggle to attract recruits, and pharmacy technician roles remain vacant. When a pharmacy is overwhelmed with complex prescription matters, the effects of understaffing are particularly pronounced,” Aguilar remarked.
What implications does this have for patient care?
“Due to pharmacy closures and lack of staffing, patients encounter prolonged wait times and have difficulty locating a pharmacy that is actually operational when required,” Aguilar stated.
“Supply chain challenges also often lead to medication shortages. This situation creates frustration and poses barriers to patients engaging with treatments prescribed by their healthcare providers. Medication is seldom an enjoyable experience and can carry side effects, so patients are significantly less likely to comply when the complexities of acquiring it are heightened.”
What are the advantages and disadvantages of Walgreens going private?
“In this type of acquisition, the expectation is that the new firm will be able to reassess the business model and the potential opportunities available to tackle challenges,” Aguilar commented. “Moreover, compared to the implications of being publicly traded, private equity investors may be more inclined to adopt a longer-term perspective on the business outlook and implement changes that ultimately yield value, even if they impose higher costs initially.”
Additional advantages of transitioning to private ownership include the freedom to explore alternative business strategies without excessive scrutiny and lower compliance costs compared to public markets due to stringent regulations, as per Boumgarden.
“Successful examples of private equity acquisitions include Dell Technologies, whose period of being private from 2013-2018 resulted in a substantial enhancement in sales and profit. Hilton is another success story; the influx of capital and expertise dramatically bolstered their operations,” Boumgarden remarked.
However, highly leveraged buyouts — those that involve a considerable amount of debt — like Toys “R” Us typically yield less favorable outcomes since the debt complicates the pursuit of strategic options, he explained.
What effects could this have on the industry, employees, and consumers?
“The approaches taken by Walgreens are likely to have extensive repercussions on how we access healthcare and health-related products,” Boumgarden stated. “Should their strategies prove successful, it could prompt other competitors to follow suit.”
Boumgarden led a 2024 commission that investigated, among other aspects, the various strategies different categories of investors employ during ownership shifts and the influence of these shifts on employees.
“When firms transition to private ownership, there often exists a notable effect on employment, with many of these firms experiencing a 10-15% decrease in jobs two years afterward. I would not be surprised if we observe something akin to this at Walgreens,” he noted.
“From a consumer perspective, the critical question will be whether the influx of capital brings about an enhancement in the customer experience that may not have been feasible otherwise.”
As for Sycamore, only time will reveal if this transaction proves advantageous.
“For these investors, the eventual success of the deal is frequently contingent upon the initial purchase price. This is optimistic for Sycamore,” Boumgarden noted. “Whether the company and broader industry can implement new strategies that align with the shifts in how individuals order and receive care remains uncertain.”
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