Walgreens-VillageMD expansion dampens Q2 operating income

Walgreens Boots Alliance is betting big on its healthcare services, following what CEO Rosalind “Roz” Brewer called a “landmark quarter” for the segment on an earnings call Tuesday.

Sales for Walgreens’ U.S. healthcare segment, which includes primary care provider VillageMD, specialty pharmacy operation Shields Health Solutions and home care company CareCentrix, exceeded $1.6 billion in the second quarter ending Feb. 28 of the pharmacy chain’s fiscal year 2023. The segment brought in $527 million in sales for the second quarter a year ago.

Investing in new services doesn’t always come cheap, however. The healthcare segment sustained a $159 million adjusted operating loss, which included the impact of adding more than 130 VillageMD locations in the past year. 

VillageMD is a key part of the pharmacy chain’s efforts to reinvent itself as a healthcare company. Walgreens invested $5.2 billion in 2021 to take a majority stake in VillageMD, planning to open 1,000 Village Medical primary care clinics co-located with Walgreens stores by 2027. In the last year, the number of co-located clinics has doubled to 210. About half of the patients at those co-located clinics choose to fill their prescriptions through Walgreens, Chief Financial Officer James Kehoe said on the earnings call.

VillageMD also closed on an $8.9 billion acquisition of Summit Health-CityMD in January, expanding its footprint in primary, urgent and specialty care. Walgreens contributed $3.5 billion to the deal. 

“What we’re seeing is the opportunity to drive more cost and growth synergies off of a multi-threat set of assets that we think can be very impactful part as we concentrate market power with more service offerings in specific markets,” John Driscoll, president of Walgreens’ U.S. healthcare segment, said Tuesday. 

VillageMD brought in more than $1.1 billion in sales for Walgreens in the second quarter, in addition to $125 million from Shields and nearly $400 million from CareCentrix. 

Walgreens’ net income dropped about 20% to $703 million in the second quarter, which executives largely attributed to less demand for COVID-19 tests and vaccinations. Operating income plummeted 84% to $197 million. Sales revenue increased 3.3% to $34.86 billion. 

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