Walgreens Boots Alliance, Inc. (NASDAQ:WBA) TD Cowen’s 8th Annual FutureHealth Conference September 21, 2023 3:00 PM ET

Company Participants

John Driscoll - Executive Vice President and President, U.S. Healthcare

Conference Call Participants

Charles Rhyee - TD Cowen

Charles Rhyee

Good afternoon, and thank you for joining us for the next session here at TD Cowen’s 8th Annual Future Health Conference. And apologies for those who had issues accessing some of the earlier panels. We are working to get those made available for replay, and as soon as we get that, kind of, sorted out, we'll let everyone know. And again, apologies for that, but glad that everyone could join us for this session here.

And I'm pleased to be joined by John Driscoll, Executive Vice President and President of Walgreens, U.S. Healthcare segment. In this session, we're going to be talking about really the transformation of site of care and how care delivery has been changing. And really, since starting in ‘21, Walgreens began its path of transforming this business into healthcare services model through its acquisitions of VillageMD, Shields, Pharmacy and CareCentrix, later acquiring VillageMD merging with Summit Health, CityMD in 2022. This saw the company add primary care, specialty care, post-acute care coordination capabilities as to its national footprint of retail pharmacies.

John, who joined Walgreens in – sorry, in October 2022 is tasked with transforming Walgreens' healthcare segment into a value-based care delivery model. Prior to Walgreens, John was CEO of CareCentrix, and prior to that, a Group President at Medco Health Solutions. John, really pleased to have you with us today.

John Driscoll

Well, delighted, Charles. We've got a lot going on. We're excited to talk about it.

Question-and-Answer Session

Q - Charles Rhyee

Yes, absolutely. And just a reminder, if you have some questions, we'll try to get them in. You can use the chat function on the -- in the link that you're watching.

So anyways, with that, John, maybe you can kind of provide a high-level review, really, of the strategy that Walgreens has undertaken and what you think the underlying advantage you see in the model that you've chosen to work towards?

John Driscoll

So I think the reason why I'm excited about working at Walgreens and working through this inflection point where we build on our legacy pharmacy franchise is to really put points on the board around how retail and health care can be relevant to reducing the total cost of care and improving the patient's journey. Walgreens has, within five miles of every consumer, we've got 9,000 stores, 200,000 clinicians, who are in a model that gets us the reach, frequency, and relevance in patients' lives. 58% of patients go to their pharmacy as the first step in non-emergent care.

So we're part of the care journey, but we're not participating in some of the fastest-growing profit pools in our legacy pharmacy, nor are we necessarily relevant. Health care is pervasively disconnected from a patient perspective and particularly from a pharmacy perspective.

And I think we've got a unique opportunity, because we've got trust, data, relevant, reach, traffic to make health care to basically enhance other health care parties, but also to participate with the investments we've made with Village, our most important investment, as in participating in the transformation of value-based care. Scripts and pharmacy is directly relevant to the chronically ill and we've got a model that works and we're seeing that in our legacy markets.

We've got 2,000 hospital relationships based on our legacy pharmacy work. Many of those faculty practices are looking to participate more in risk. We've got a partnership with Pearl that will allow us to build, kind of, more of an MSO services model in the ACO REACH area, but also to provide a flexible, more tech forward solution for those, who don't want to partner necessarily and is deep away with Village or do not want to be employed physicians, which is the Village model.

We are -- Shields is our participation in specialty pharmacy for hospitals, and it's rapidly growing, drives real results. And post-acute is another area of a rapidly growing and relevant home and community opportunity to develop products around network services in the post-acute world.

What clinical trials recruiting? I think we've talked about eight or nine pharma companies, I think we're up to 11, where we're directly participating in clinical trials, recruiting, managing those patients during those clinical trials, and rebuilding that as a profitable. We are investing in places where our pharmacy experience is relevant and where it can be added value. And I can go -- I don't want to drone on this one piece, but we are seeing positive results in patient outcomes in virtual and physical connection with Village.

We're seeing the relevance of leveraging CareCentrix’s long-term deep relationships in post-acute and helping Walgreens really be a more added value partner to the health plans we work with. And we're seeing an acceleration in shields and in clinical trials recruiting, because of our legacy pharmacy relationships. And each one of these is involved in providing lower cost alternatives that are driving higher adherence.

And I'm happy to go area by area. But our strategy is to build on what we've got, invest in areas that we think are going to be relevant to the future, where there's increased profit pools, tie it together, scale and repeat.

The only other thing I'd say is it's our goal here is to have an unconflicted model. So whether it's patients, providers, or health plans, to take advantage of the fact that we are independent and really be the independent partner of choice, which I think allows us to play more on the same side of the street of whether it's a hospital-based provider, a physician that wants to be employed, a health plan that doesn't necessarily trust its PBM, or a pharma company that needs more direct contact with its clinical trials recruits. In each of these areas, we think there's a real advantage in being an independent.

Charles Rhyee

There's a lot there to unpack, but maybe first to dive in. The partnership with Pearl, that just came out recently. Maybe you can go into more details, share with us sort of how that relationship works? What are sort of the key advantages here? And how do you see that working alongside the investments in VillageMD?

John Driscoll

Well, VillageMD, we're really focusing on Village, Summit and City and really on our power markets where we can invest and leverage those relationships. It has been a relatively expensive journey that's driving results. And again, it's expensive, but 66 - about two-thirds of our sites have only been up for open for 18 months. And so we're looking for now that is I think it's in 21 different markets, and we're going to focus on the most important ones as we grow Village.

But there are probably 1,000s of communities where we could work with hospital-based systems and independent doctor groups. We don't have the capital nor the patients to develop that kind of integrated model everywhere. So we were looking for a more flexible model for those markets that where village is not relevant or where we don't want to invest capital.

And so what Pearl allows us to do in more of an MSO services place where we will be taking risk with Pearl. And we wanted a technology partner that had a plug in simple solution that had shown good results and was relevant to the -- that provided relevant information at the point of care without an expensive install, so that we can create a flexible way to work with Walgreens as we want to lean into risk for doctors that want to tech forward solution.

And again, we're a partner that really valued our local pharmacy relationships, our historical hospital relationships, and what we can do in the stores. It's a way ultimately of providing more community access to more groups outside of those Village markets, so we can leverage our infrastructure in the stores. Effectively, we've got all of this relevant infrastructure for healthcare. We need to drive more value in it. And one of the ways to do that is to partner at risk in markets where Village is not or doesn't intend to be and do it with a -- in a tech forward asset light way.

So we’re – I mean, the proof will be in the pudding Charles, but we haven't signed up anybody yet. But I think that's going to be in addition to village driving growth where we've got a more integrated model, I think that Pearl's going to be terrific help in providing a different version of access to the same opportunity in the transition of value in markets where either we don't want to make that investment or but we do actually have partners that want to work with us.

Charles Rhyee

Yes. All of that still ties back to leveraging, sort of, this national footprint of 9,000 pharmacies that you have across the country and really changing the way people think of the pharmacist as not just a place where you pick up prescriptions, but really as a care provider and a key part of that. You've spoken in the past about, sort of, integrating, and you talked a little bit earlier about the pharmacy tied to the patient care team. How do we -- what's needed to change the mindset of consumers and patients that this is more effective, equally a better way to deliver care?

John Driscoll

Well, I think there's a lot of better ways to deliver care, but I don't think we have to change the mindset. I think we have to change the workflow, Charles. If you think about it, like I was in a VillageMD, this is the nature of running around the country. In Chicago yesterday, and you look at where patients and doctors and pharmacists can walk at a co-located clinic back and forth, that's working. And we're seeing the lift in scripts every month from the, basically our share, if you will, within the VillageMD patients. We're seeing how the pharmacist and the docs are finding it more effective to work together, and we're driving better outcomes.

I think it's more about making sure we optimize the workflow, whether it's virtual, physical. Patients deserve better, more convenience, easier access. We make it really hard in the healthcare system to access care, so that gives us the right to win, if you will, to make it accessible. And then we have to set up, and we are, a workflow that is seamless. I think the consumers want care to be easier, want to be able to have their, we can do same-day appointments at Village.

You can get your scripts faster. We need to make it really simple. So it's more about our performing in workflow than I think it is about changing the consumers' mind. Charles, I don't know whether you've been to our Boots U.K. stores, but in the NHS, in territorial England and even more so in Wales and Scotland, we are increasing the number of services that pharmacists can provide in stores. And the demand outstrips supply in terms of interest of the consumers, and this was just -- this hasn't been widely marketed, but it is super successful and the pharmacists like it and the patient like it.

Because if you've got a UTI or you're concerned about your blood pressure, why should you have to set up an appointment with the doctor, wait for two weeks or more, make sure you get evaluated by the NP, look at your record, come back, when really you need to be -- chronic heart disease is the most likely killer in the United States. The most important way to manage it is checking your blood pressure.

Pharm Tech can do that and then titrate the drugs. There are regulatory changes that happen there. But the key point tying back to your question is, it didn't require a mindset change for patients to immediately start accessing health care that they needed at a more accessible point. So I think it's on us to figure out workflow rather than to change the patient mindset. But that connection between the consumer piece and the health care pieces, I think where a lot of retailers have failed historically, and we aim to win at.

Charles Rhyee

Yes. No, that means, are there a lot of changes that need to be done here regulatory-wise to…

John Driscoll

There are some. It depends on the level of service. What's great today is we're testing out virtual models that don't require that. So I'll give you an example. In stores in New York today, we've got iPads where you can immediately get a telemedicine consult with a CityMD or summit a doctor. That's easy. It's just digitally connecting, because at the point of prescription, some chronic members have questions or have needs, and they want it answered immediately. It's sort of meeting the patient where they are. We're also moving to virtual pharmacy in states where we can all do that. And we're changing the mix of services in other states.

But I think there's a lot we can do by simplifying workflow in it and leveraging digital tools while we work towards some of the regulatory changes. But there is a broad mix of things we can do right now, and we're testing that as well with health plans, because there's also an appetite with health plans to have us just because we've got access, immediate access to patients to do more.

I mean the one we've talked -- you and I have talked about before is colorectal screening where we're getting 3 times the yield for Blue Shield. So we're testing and growing in a lot of these areas around places where you need a consumer engaged, where there's a consumer need that is impeded, if you will, by the natural barriers of the health care system, and we can play immediately.

Charles Rhyee

Yes. Maybe going back to sort of your opening comments, right, you're talking about that -- I want to touch on the payer agnostic portion of it. Obviously, I think a lot of folks look at sort of having the payer piece when you look at some of the other models that are vertically integrated in the market today, whether it has retail or not, the payer portion definitely seems to offer support, right, because it has membership to drive volumes.

That's obviously something that you're not benefiting from per se, but maybe talk a little bit more about sort of having a payer-agnostic model. You have some relationships with payers. Currently, to me, it seems like, to your point, right, you can be sort of a plug-and-play network for maybe more regional health plans. What is sort of the feedback you've gotten sort of in the early days with some of your partners? Maybe you can kind of share some of that with us.

John Driscoll

So I don't look at us as payer agnostic. We got to be payer friendly. We've actually got relationships with everyone even some of the empires of integration that will be -- go unnamed. But we have really a great relationship with most health plans, particularly in Medicare because our adherence programs are second to none. And so we have to -- and we've consolidated all of our go-to-market and payer relationships, so that there's -- we're approaching them from a One Walgreens perspective.

We're offering a portfolio of services, we've not integrated that as effectively as the past. And we're looking to be an added value partner, partnering directly with health plans to compete on bids for business, partnering with health plans that need adherence and improvement in stars. And I think we're aggressively pursuing that in a way that was more transactional historically, and we're bringing a relationship focus. But I don't want to be agnostic.

I want to be deeply engaged in different -- the needs of horizon or different than the needs of guide well or different than the needs of a United or in Aetna. But we are working to deepen our relationships on a performance basis with all of them, not just on the drug and adherence side, but when they talk to Walgreens, you're also talking to CareCentrix, what we can do with Shields, what we can do with Village.

And I think that's going to allow us to deepen our relationships. We haven't really taken advantage of that independence, but I think the white space for addressable opportunity, whether it's adherence services or partnering in risk. We're improving the outcomes and lowering the cost on specialty drugs, we're just scratching the surface of. And again, we're looking at it as those are -- there's probably 50 critical relationships. We've got contractual relationships with all of those payers, as well as a number of others. And we're going to partner with them and find ways where we can basically deliver for them and take risk on it.

Charles Rhyee

You talk about taking risk. I mean, what are the sort of the key pieces that you -- is there anything else that you need at this point to enable you to do that? Is it a degree of more maturity within the VillageMD base? Or more integration into the core stores? Or are you able to go contract now?

John Driscoll

I think we got a terrific underwriting capability when we bought CareCentrix. We've got -- or they bought me depending on how you look at it. We've got some decent underwriting as well in our finance department at Walgreens. We've got a history in the case of Village and Shields of embedded actuarial and economic teams there. I think we're good from a capability perspective. We've got a track record in the legacy markets of Village, as we talked about and looking at some of the Medicare info that we've shared across Dallas, Houston and Phoenix that we've delivered outcomes.

Even in our fee-for-service contracts, Charles, like Summit Medical Group actually has really good outcomes from a track record in terms of reducing hospital admissions per thousand for their commercial and Medicare population. So there's two components -- well, three components. You need to have that underwriting actuarial and contracting. You need an organization that can perform and you need a track record.

And I think we're in pretty good shape to scale it. And we're very comfortable in continuing. I think there's a lot of opportunity to flip the fee-for-service volume, we've got a Village or converted over time, City Summit and continue to grow the risk-based business at CareCentrix. And we're looking forward to getting into market with Pearl and proving we can do it there as well and show that with an integrated -- even on a contracted basis with the right digital integration, not physical integration, that we can also leverage our contact with the stores.

And frankly, with your chronically ill member patient who's going to see their pharmacists a lot more frequently than their doctor, in 30% to 40% of the case, folks who are in Medicare Advantage or miscellaneous managed care plans, they don't have a primary care doctor or they don't know their primary care doctor. We can help simplify, integrate and I think that's a lot based on convenience, we can help solve that. But from a capability track record and team perspective, I think we're in pretty good shape.

Charles Rhyee

I see. I think in the past, you guys gave some targets in terms of co-located VillageMD, Walgreens kind of locations, if I recall, something like 600 by 2025 and 1,000 by 2027. Are those kind of still sort of the milestones we should be thinking about -- framework?

John Driscoll

Yes, I think we should be -- I'm obsessively focused on delivering better results faster. And I think that we are always open to revisiting capital and capital-light options. I think we'll have more to talk about in terms of the look forward. But I think we've talked about this, Charles, I want to concentrate on markets where we've got real market power. I want to deliver more profitability we need to, and we feel the responsibility to our shareholders to deliver more profitability from some of the markets we've invested in. And I think our focus is going to be accelerating profitable growth while we're thoughtfully expanding and allocating capital is sort of how I think you should think about our strategy right now and going forward.

Charles Rhyee

That's helpful. And that kind of leads into -- there's a question here from the audience. And I guess it gets to that, right, I think investors are concerned about sort of the economics of the health care services model. Obviously, you're in a heavy investment phase. So it's a little hard to see it, I'm sure. Anything you can share about sort of the returns on capital, maybe on some of the mature sites? Anything that you kind of share that kind of gives you confidence? And what do you think the business model looks like several years out, once we're kind of more fully integrated, more -- a bigger base of co-located stores, et cetera, that's matured.

John Driscoll

So obviously, we're in a quiet period right now. But I think we talked about how we've got three markets. I mean, if you remember, of our 301 locations, two-thirds have been opened in the last 18 months and I think, 43% just in the last 12. And so it's a pretty -- we've already committed a lot of capital, and we are in the investment phase there. We're seeing positive profitable momentum in every other area on our health care book. But if you look at the legacy markets at Village, like the Houston, Dallas, Phoenix that we've shared, where we've kind of carefully drawn out cohort analysis.

We've got a model that is delivering consistent improvement in MLR reductions. And it's through the traditional stuff, reducing possible, that it's per thousand, reducing the variability of unmanaged diabetes. It's being brilliant at the basics of managing chronic care. And I think what you're going to see is us being a lot more thoughtful about capital investments over time, leveraging the investments we've made and really focusing on driving a higher return on capital than you've seen historically. But we are productively impatient, I would say, in terms of making that, and we're seeing the results. The -- we have a model that works at Village that I think we can scale, and it's our responsibility to show that, put more points on the board, and that's what we're focused on.

Charles Rhyee

And so if we think about that then, and this is sort of a continuation of this question, what do you think then -- obviously, so VillageMD, you have evidence that it is delivering results, improving lowering cost of care, obviously, that is good in a risk-based model for Village. What are sort of the additional benefits do you expect to see the total cost of care once you start layering in CareCentrix more heavily Specialty Care through Summit. And what makes this unique versus -- because I think investors are looking and saying, we can invest in Walgreens, who's undergoing this health care strategy or we could invest in a very specific at-risk provider groups or there's other options. What do you think is unique that we think that investors should take a harder look here?

John Driscoll

Well, I think like from an investor perspective, we're a growth bargain for any number of reasons I could argue. But I think what my goal here -- I think what's the right way to think about this mean our -- my model of success is sort of the Optum model, where each one of these initiatives -- each one of these businesses does well on its own and where it's logical, you connect and grow. And I think that's the -- that really is the way we think about it. And each one of them is growing, we see whether it's every clinic we've got open, every business unit we own is actually growing month-over-month, quarter-over-quarter.

A number of them are quite profitable. And we're -- what we want to do is make sure we're delivering, investing and expanding in home and community-based services that we are continuing to put -- sign up more hospital specialty pharmacy deal -- with deals with Shields. And I think where those can connect, we had a bid the other day with a health plan that wanted to compete against one of the PBMs that was trying to commoditize us and we went in with a joint bid with the health plan, our pharmacy arm and CareCentrix. And you're going to see those mixes of where someone's got another plan has a region that's got a real problematic line in terms of managing complex diabetes based on their mix. We've got pharmacies that are relevant, we can provide unique DME and home health services.

So we'll customize where we need to connect, but each one of these is going to make sense and grow on its own. And that's the way I think you think about it over time. We're not going to mosh it together. We're going to respond to the market and try to be creative like in this most recent health plan bid where we were able to edge out the PBM and come up with kind of a unique offering because of our mix of assets. And I think with clinical trials recruiting, we've got an opportunity to leverage our relationships with pharma as well at the back end on real-world evidence and managing complex patients in specialty because of the right to win, we'll have when we deliver, which we are, on clinical trials recruiting.

We are a natural partner as those drugs and devices come in. So we will -- so that gives an -- again, more services and more profitable services and more volume to the stores connecting to -- because based on the relationships we have with drugs, the pharma and device manufacturers who are -- who want us to recruit members for their trial. So I think each one of them has to make sense on its own, but it gives us a unique ability to kind of mix it up where we see it's relevant.

Charles Rhyee

And I guess, kind of tying it all together here, if we think about the model going forward, is it fair to think it's -- you have this pharmacy footprint and where you have great density with your other assets. That's where you kind of lean in and invest more capital, whereas elsewhere partnership looks like the more likely route. If we think about that then going forward, I mean, we're still early days. I guess what is to you, what does success look like in a 12-month period, a 24-month period, five years, what -- how do you define success? Maybe not in time frames that specific, but generally speaking, what are you looking for as you leave this business?

John Driscoll

It's a little bit like -- it's a little bit of a different version of the answer I gave you before. Each one of these business is growing faster and is more profitable than our base business. Each one of those businesses leverages and ties in and creates more profitable volume for our legacy pharmacy assets, and we have creatively pulled together those assets where it makes sense for health plans or health systems or providers, so that the patient experience -- we make health care easy for the patient. We are driving a more profitable series enterprise for all of our investors, and we're lowering the total cost of care.

Charles Rhyee

Is that possible to express in median in terms of like return on invested capital hurdle or anything like that?

John Driscoll

It has been in a quiet period and I'd lose my job if I gave you the specifics. I thought I tried. But no, but I think, but I just want to the message I'd say is we feel a moral responsibility to drive a faster in a larger quantum of value based on the trust and the capital we've been given by the shareholders. We know that we aren't where we need to be. We are committed to improving that performance and committed to do it consistently over time.

Charles Rhyee

Yes. No, I completely understand that. And wish you luck and look forward to in a few weeks when we get to hear more on the outlook. But John, thanks really for your time and for your insight here. I really appreciate it. I'm sure I appreciate it as well.

John Driscoll

Delighted Charles. And we're open to talk to shareholders at any time.

Charles Rhyee

Great. And thank you, everyone, for joining us for this session and look forward to having you join us on the next session. Thank you, everyone.