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Walgreen FY 4Q14 Earnings Call Notes
Boots and Bergen
“We closed fiscal 2014 entering the next important phase in our strategic partnership with Alliance Boots amending an exercise and the option to complete the second step. Through the transaction, the new Walgreens Boots Alliance will have unmatched global reach strength and leadership and a broad mix of retail health, well-being and beauty businesses and an international pharmacy wholesale network all dedicated to ensuring people across the world lead healthier and happier lives.
This fiscal year, we also completed the transition of our drug distribution into AmerisourceBergen. Their company now supplies virtually all of our brand and generic medications; the strategic relationship together with Alliance Boots is establishing the leading global pharmaceutical wholesale and distribution network.”
Front end comps up on basket size, traffic down
“Turning to our front-end comp sales, which increased 1.3% in the fourth quarter, average basket size grew 3.5%, while traffic was down 2.2% as we cycled a more aggressive promotional environment from a year ago.
margins fell 100bps based on pressure in pharmacy.
‘Now on to margins, adjusted gross margin was 27.9% in the current quarter compared to 28.9% last year, 100 basis point decline. Margins were solid on the front end, but were weak in the pharmacy… The primary drivers for the pharmacy margin decrease were increased third party reimbursement pressure partly due to contract step downs increased Medicare Part D business mix including our strategy to continue driving 90-day prescriptions at retail, pronounced generic drug inflation on a subset of generic drugs and the mix of specialty drugs partially offsetting these pharmacy margin decreases were the positive effect of the increased rate of introductions of new generic this quarter versus the year ago quarter and purchasing synergies in the pharmacy.
Drug manufacturers can and will raise price in a tight market
“Let me say a few additional words about generic drug inflation. The dynamics under which generic drug and manufacturers can avail themselves of pricing actions has not changed. They are able to raise prices when demand outpaces supply. These drug supplies can be impacted by a number of mechanisms including regulatory actions by the FDA resulting the shutdowns of both API and finished dosage for manufacturing plants, generic drug manufacturer consolidation and portfolio harmonization, API manufacturer consolidation and FDA backlog on approvals as well as a shrinking pipeline of first to market generic blockbuster launches.
Our current environment is experiencing all of these mechanisms and as a result, the average inflation in our basket of generic drugs is mid-single digit as measured on a comparable drug priced basis.
Drug inflation is being caused by large increases in a small number of molecules
“This change is caused by very large price increases and a small percent of molecules because these supply constraints and other factors are continuing, we expect a generic drug inflation will be with us for a while.
headwinds through 2015
“The tailwinds we expect through fiscal 2015 will be largely offset in the short-term. Of note, our reimbursement rate pressure, including specifically lower Medicare Part B reimbursements coming in January of 2015 and the continued impact of generic drug inflation. Also affecting the EPS growth rate in 2015 is the timing of the close of step two with Alliance Boots.
Continued pressure on margins in 2015
“In 2015, we don’t expect to see that significant of a step-down. We think there will continue to be pressures plans we’re looking to control costs. And then certainly with generic inflation being a big driver of those contracts versus the deflation that we’ve seen over the past, we’re going to have to really understand and understand where generic inflation is going.
We may need legislative action to control this cost inflation
“I think it will probably end being both [better contracting and legislation]. I think certainly we do think that it’s going to persist based on our intelligence and all the industry intelligence that we’re seeing out there. It’s hard to predict. I think Jeff and his team have really ramped up their predictive modeling so we can understand what may happen going forward. But, I think that we may indeed see the benchmark, the tables begin to reflect what’s really going on with cost inflation, we’ll begin to see some of that as we speak and then a lot of the different things that Jeff and team are doing with regard to putting inflation protection into contracts. So I think we will begin to be able to get after.
Lots of dynamics leading to inflation
“Well, again, I think it’s a host of things that have driven that inflation. Certainly, there is consolidation in the buying space with us and three or four other large buyers buying about 80% to 90% of the generics. But at the same dynamic, there is some consolidation in suppliers. But that said, I wouldn’t say that all of it. There are a lot of other dynamics
Inflation is coming from a molecule-supply perspective, not a vendor perspective
“I would look at it as more a molecule-led than vendor-led. I mean, we continue to forge very deep relationships at the highest levels and on a global scale with the major generic manufacturers. But the inflation that we’re seeing is really not associated with any one particular vendor. It’s really based on the molecule opportunity where there is harmonization in the portfolios, or manufacturers have supply issues or pulling out of molecules where that price opportunity comes, somebody then takes an increase and the others feel some confidence to follow up, sometimes later than others.