Company Overview:Walgreens Boots Alliance, Inc. is a holding company. The Company is a pharmacy-led health and wellbeing company. The Company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The Retail Pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores, care clinics and providing specialty pharmacy services. The Retail Pharmacy International segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The Pharmaceutical Wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses. The Company's portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as global health and beauty product brands, including No7, Botanics, Liz Earle and Soap & Glory.


WBA Details
 
New WBA-RAD Asset purchase deal:Walgreens Boots Alliance Inc. (NASDAQ: WBA), a pharmacy-led health and wellbeing company, and Rite Aid had decided to terminate the initial deal  after a year-and-a-half post realizing that the regulatory approval may not be forthcoming. Accordingly, Rite Aid sold 2,186 of its stores located predominantly in the Northeast, Mid-Atlantic and Southeastern regions to Walgreens. Moreover, this termination led Rite Aid Corporation to deliver a strong second quarter results, boosted by a one-time termination fee of $325 million secured from Walgreens Boots Alliance Inc. Overall, the new deal marked a step down from WBA’s initial plan to take over Camp Hill, Pa.-based Rite Aid Corp. for $9.4 billion. But after spending almost a couple of years in regulatory review both the companies abandoned their initial plan. The new arrangement saw Walgreens Boots obtaining regulatory clearance for an amended and restated asset purchase agreement to buy 1,932 stores, three distribution centers and related inventory from Rite Aid Corporation for $4.375 billion in cash and other consideration, from the Federal Trade Commission to finalize the transaction. The store purchases have been earmarked for commencement from October, and forecasted to finish by spring 2018. With this, WBA will have greater scale and coverage in a variety of Northeast and Southeast markets; and the synergies seem to be spread out over four years. The purchase price is said to be healthy and the deal will be primarily accretive in 2019. WBA also expects a re-bannering post appropriate integration of the stores. Particularly, WBA would convert the acquired stores, which are primarily in the Northeast and South regions, to the Walgreens brand over time.
 
Long-Term Global Supply Agreement with Fareva: WBA has made a binding arrangement with Fareva, which is a 10-year global agreement for the manufacture and supply of own beauty brands and private label products, including products for sale in the USA. The proposed agreement would form a partnership to offer Walgreens Boots Alliance with a core multinational manufacturing and development resource that would enable the company to accelerate its global product strategy. Under the terms of the offer, Fareva would take ownership of BCM, Walgreens Boots Alliance’s contract manufacturing business, which operates factories in the UK, France and Germany. Further, Fareva manufactures in 11 countries, including the USA, and has a major research and development capabilities. The proposed agreement that is subject to Works Council consultation and regulatory approval, is likely to finish by the end of calendar year 2017.
 
340B Program highlights:WBA during the meetings with various investors, had clarified the intention on its participation in the U.S. Health Resources and Services Administration 340B drug pricing program. Moreover, for the first nine months of FY 17, prescriptions related to the 340B program represented less than 1% of the Retail Pharmacy USA division’s prescription volume. The division has around 1,200 340B contracts. During the first nine months of FY17, 340B prescriptions were filled at approximately 6,100 of the division’s pharmacies. 340B prescriptions represented a small percentage of the total prescriptions filled by these pharmacies. The proposal from the U.S. Centers for Medicare and Medicaid Services, which was announced in July 2017, shows to address how Medicare pays hospitals for drugs acquired under the 340B program, but does not propose eliminating the program altogether. The hospital market represents slightly more than half of the Retail Pharmacy USA division’s overall 340B prescriptions. As required by law, 340B drug inventory is owned by the covered entity, not by the pharmacy.


Third Quarter Results (Source: Company Reports)
 
FY17 Third Quarter results met expectations: WBA in the third quarter of 2017 managed to deliver performance on the expected lines as strategic partnerships had brought more patients to the U.S. pharmacies. This had led to the highest reported quarterly retail prescription market share in the U.S. The group’s Retail Pharmacy USA division’s sales surged 6.3% to $22.5 billion during the third quarter of 2017, which includes two months of results for AllianceRx Walgreens Prime, which is their recently formed central specialty and mail services business. Sales in comparable stores enhanced 3.7% during the quarter against prior corresponding period. Pharmacy sales surged 10.3% on a year on year (yoy) basis during the quarter which comprised 69.9% of the retail pharmacy division’s sales. Better prescription volumes including central specialty and mail post the formation of AllianceRx Walgreens Prime contributed to the performance. Comparable pharmacy sales enhanced 5.8% during the third quarter of 2017 mainly on the back of better volumes from Medicare Part D and ongoing volume growth from their earlier strategic pharmacy partnerships. Performance of beauty category and beauty differentiation stores was seen to be driven by No7 and Soap & Glory. WBA intends to continue to focus on beauty and health segment, and has started to rollout more products.



Retail Pharmacy Product Differentiation (Source: Company Reports)
 
WBA in the third quarter has also reported the adjustable net earnings attributable growth of 11.9% to $1.4 billion, which rose 13.6% on a constant currency basis, against the same quarter a year ago. The adjusted diluted net earnings per share for the third quarter had increased 12.7% to $1.33, and rose 14.4% on a constant currency basis, against the same quarter a year ago. The sales in the third quarter rose 2.1% yoy to $30.1 billion, while rose 5.0% on a constant currency basis. Moreover, the company had raised the lower end of its guidance for FY17 by 8 cents per share and now forecasts the adjusted diluted net earnings per share in the range of $4.98 to $5.08.
 
Ongoing Cost control: The group announced a $1.0 billion cost-reduction initiative in August 2014. In 2015, they recognized further opportunities for cost savings that enhanced the overall forecasted cost savings of the Cost Transformation Program by $500 million to a targeted $1.5 billion by the end of fiscal 2017. Major areas of focus comprised plans to close over 200 stores across the U.S. The group has reported that they are ahead of their schedule in achieving the target.
 
Increase in dividend:WBA had declared a quarterly dividend of 40 cents per share, which is an increase of 6.7%. The increased dividend was payable in September 2017 to stockholders, and has raised the annual rate from $1.50 per share to $1.60 per share. This had marked the 42^nd consecutive year in which Walgreens Boots Alliance and its predecessor company, Walgreen Co., have raised the dividend. On the other side, WBA had authorized $5 billion share repurchase program of the company’s shares prior to the program’s expiration in August 2018.


Year-to-date Performance (Source: Company Reports)
 
Stock Recommendation: WBA would release their fourth quarter and FY17 earnings results on October 25, 2017; and given the year-to-date performance, the results are expected to on track with ongoing momentum. In the last performance reporting, Walgreens Boots Alliance posted better specialty sales which led to a positive impact on gross profit. The retail prescriptions’ market share on the usual 30-day adjusted basis improved over 110 basis points to 20.5% during the third quarter as compared to the same period last year. The group reported that this was their highest market share ever reported. On the other side, they continued to launch new brands into their current beauty differentiation locations, including Botanics, while they are on track to launch their beauty offering to over 1,000 additional stores by the end of the calendar year. Their cost transformation program is also ahead of the schedule. Further, the recent WBA-RAD transaction (although smaller than previously anticipated) is now associated with lower purchase price and this will free up some capital that Walgreens can use for share repurchases or other opportunities. WBA stock has fallen 5.5% in last one year (as on October 05, 2017) and is placed at a decent level. Given the long-term opportunities and dividend growth scenario, we put a “Buy” recommendation on the stock at the current price of USD 75.83.

 
WBA Daily Chart (Source: Thomson Reuters)

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