Walgreens cuts 2019 profit forecast, hit by lower drug prices

(Reuters) - Walgreens Boots Alliance Inc shares fell 13 percent on Tuesday after the company cut its 2019 earnings forecast and reported a disappointing quarterly profit in the face of stubbornly low generic drug prices in a crowded market.

FILE PHOTO: A customer walks out of a Walgreens pharmacy store in Austin, TX, U.S., March 26, 2018. REUTERS/Mohammad Khursheed/File Photo

The drop in shares to a more than five-year low wiped off nearly $8 billion from the market capitalization of the worst performing stock in the Dow Jones Industrial Average this year, and weighed on shares of rival CVS Health Corp and drug wholesalers.

Drug retailers like Walgreens and CVS Health have been squeezed by reimbursement pressure as their pharmacies receive less for filing prescriptions coupled with a steep decline in generic drug prices for several years.

And there is no relief in sight, with generic drug prices failing to recover as competition heats up and heightened public and regulatory scrutiny limits the pace of branded drug price increases.

A combination of all these factors resulted in the “most difficult quarter” for the company since the merger of Alliance Boots and Walgreens in 2014, Walgreens Chief Executive Officer Stefano Pessina said.

“While we are not the only company that has been impacted by the marked change in the environment, that’s not an excuse,” Pessina said.

Evercore ISI analyst Ross Muken said the entire pharma supply chain has felt toxic over the past few months, but pharmacies have been suffering more than most, adding there is very little to get excited about for the foreseeable future.

Walgreens reduced its adjusted earnings growth forecast for fiscal 2019 to roughly flat from a range of 7 to 12 percent growth on a constant currency basis.

The magnitude of Walgreens’ forecast cut surprised some Wall Street analysts, who had expected it after the company had warned about increased competition and reimbursement pressures at its pharmacies.

While expectations rapidly declined the last four weeks, these results and the forecast missed the most bearish of predictions, Baird analyst Eric Coldwell said.

The company said it would speed up cost cuts, which include shutting stores and consolidating warehouses, to stem some of the losses from the challenging market conditions and expects to save more than $1.5 billion annually by 2022, up from its previous estimate of $1 billion.

The company has also largely stayed away from big deals, instead focusing on partnering with companies such as Microsoft Inc and Kroger Co.

On a post-earnings call with analysts on Tuesday, company executives played down the possibility of an acquisition, a move that has been questioned by analysts for sometime now.

Edward Jones analyst John Boylan said the current drugstore environment may accelerate industry consolidation because there are many small competitors that likely are feeling the same pressures.

“We predict this could lead to increased sales volumes at the larger players, such as Walgreens, over the long term as they gain share from smaller competitors.”

Excluding items, the company earned $1.64 per share, missing analysts’ expectations of $1.72 per share, according to IBES data from Refinitiv.

GRAPHIC: CVS and Walgreens share performance, click

Reporting by Aakash Jagadeesh Babu and Saumya Sibi Joseph in Bengaluru; Editing by Shailesh Kuber, Sweta Singh and Anil D’Silva