Walgreen stands to reap benefits of health care reform

(Crain’s) — Walgreen Co. is waiting to see how the new health reform law will impact the drugstore giant, but analysts are already looking toward the benefits.

The $938-billion overhaul of health care, signed into law Tuesday by President Barack Obama, promises, among other things, to provide coverage for 32 million uninsured U.S. citizens.

Greg Wasson, CEO of Deerfield-based Walgreen, said Tuesday in a conference call that the retail chain of more than 7,000 drugstores expects “to benefit from that as a provider.”

“We’ve said all along that we support the three core tenets of health care reform: improved quality, greater access to care and lower cost,” he said.

Prescription drugs account for almost two-thirds of Deerfield-based Walgreen’s revenue — which in fiscal 2009 totaled $63.3 billion.

With the new law, prescription drug sales stand to increase, said Jeff Jonas, an analyst at Gabelli & Co. in Rye, N.Y. “In the long term, the law is very positive for Walgreen,” Mr. Jonas said. “What you get is more people filling prescriptions, and that means more volume for Walgreen.”

Mr. Wasson said the company’s in-store health clinics would still “continue to grow and be strong” without or without the new law. “There’s just not enough access (to health care), as you know, out there,” he said on Tuesday's conference call with industry analysts, but “if we have another 30 million folks with coverage, it’s going to become an even greater need.”

Walgreen has more than 700 Take Care and worksite clinics and about 7,162 stores.

The CEO noted that Walgreen will not only look at the number of clinics they have “and what the health care reform may do to accelerate the growth, but also the services within the clinics.”

“We should see more demand for” both number of clinics and the services that the company offers within the clinics, he said.

Walgreen will also examine the impact of the new law on its role as the employer of 200,000-plus workers nationwide, Mr. Wasson said.

Over the past year, the National Assn. of Chain Drug Stores has lobbied to see certain provisions in reform. Two key areas in the bill that became law: eliminating the coverage gap in Medicare part D by 2020 — ending the so-called “doughnut hole” that causes some to skip doses or switch to generics to contain costs; and changing the definition and method of calculating Medicaid reimbursement rates, a sensitive area for Walgreen.

The road ahead isn’t completely clear for Walgreen. While the new law provides more federal funding for Medicare and Medicaid, it “might lead to tougher negotiations” on prescription pricing with state governments and large insurances companies, said Neil Stern, a partner at Chicago retail consultancy McMillan Doolittle LLP. “The net (gain) should be more volume, at perhaps compressed profit margins.”

Still, the market seems to like the outlook for Walgreen. Its shares have risen about 3% since the passage of the new measure, trading at $35.46 Wednesday morning.

The sweeping health reform measure comes just as the company posted quarterly earnings that fell short of analysts’ forecasts. Net income rose to $669 million, or 68 cents per share, in the second quarter ended Feb. 28 — below the 71 cents per share that analysts on average expected, according to Thomson Reuters IBES.