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Walgreens Boots (WBA) Gains From New Pacts, Faces Margin Woes

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Walgreens Boots Alliance, Inc.'s (WBA - Free Report) various strategic partnerships are expected to benefit the company over the long run. However, it has been reeling under the effects of persistent reimbursement pressure and a competitive market. The stock carries a Zacks Rank #3 (Hold).

Walgreens Boots exited fourth-quarter fiscal 2021 with better-than-expected earnings and revenues. The robust sales of Boots.com instill investor confidence. To date, Walgreens Boots has administered more than 40 million COVID-19 vaccinations and 16 million COVID-19 tests.

The continued acceleration of Walgreens’ omnichannel offerings and a rise in MyWalgreens memberships were notable upsides during the quarter. Faster retail pick-up-related development in the United States, acceleration of its investment in VillageMD and increasing rollout of Village Medical at Walgreens Boots' full-service primary care clinics look encouraging. Expansion of both margins is also encouraging.

The intensifying competition in the U.S. retail drugstore market has compelled Walgreens Boots to diversify its product offerings. In September 2021, Walgreens Boots, through its wholly-owned subsidiary, Walgreen Co., completed the majority investment in Shields -- an industry leader in integrated, health system-owned specialty pharmacy care. This investment reflects Walgreens Boots step to boost innovative healthcare models for future growth, providing a platform to further develop health system partnerships and coordinate care for those with complex, chronic conditions.

Further, during the fiscal fourth quarter, Walgreens Boots and Blue Shield of California announced a new strategic collaboration to expand access to healthcare, lower costs and bring innovative services to enhance the consumer experience for individuals, families and communities throughout California. Earlier this year, Walgreens partnered with Clover Health to begin serving its members. These payor relationships allow Walgreens Health to serve a patient population comprising more than two million lives, with the plan to grow more partnerships and markets in the coming years.

On the flip side, a shift in the mix of pharmacy prescription volume toward programs offering lower reimbursement rates might affect Walgreens Boots’ results of operations. The company’s 90-day retail offering for patients with chronic prescription needs is at a lower margin than comparable 30-day prescriptions.

In the last few years, a slowdown in generic introduction has been affecting Walgreens Boots’ margins. In addition, of late, increased reimbursement pressure and generic drug cost inflation have been hampering Walgreens Boots' margin significantly.

A weak solvency scenario and a moderately leveraged balance sheet are headwinds. Walgreens Boots exited fiscal 2021 with cash and cash equivalents of $1.19 billion compared with $1.35 billion recorded at the end of the third quarter of fiscal 2021. Meanwhile, the company’s high level of debt on the balance sheet is a cause of worry, especially when the coronavirus mayhem has forced the corporate sector to halt production and supply.

Over the past six months, Walgreens Boots has underperformed the industry. The stock has gained 12.2% compared with the industry’s 22.1% rise.

Key Picks

Some better-ranked stocks in the broader medical space include Apollo Endosurgery, Inc. (APEN - Free Report) , Cerner Corporation (CERN - Free Report) and Poseida Therapeutics, Inc. (PSTX - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Apollo Endosurgery has a long-term earnings growth rate of 7%. The company‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.

Apollo Endosurgery has outperformed its industry in the past year. APEN has gained 132.2% compared with the industry’s 12.6% growth.

Cerner has a long-term earnings growth rate of 13.3%. The company’s earnings surpassed estimates in the trailing three of the last four quarters and met estimates in one. Cerner has a trailing four-quarter earnings surprise of 3.2%, on average.

Cerner has outperformed its industry in the past year. CERN has gained 19.5% against the industry’s 38.2% decline.

Poseida Therapeutics has a long-term earnings growth rate of 9.9%. The company’s earnings surpassed estimates in the trailing three quarters and missed in one, delivering an average surprise of 4.3%.

Poseida Therapeutics has underperformed its industry in the past year. PSTX has declined 32.4% compared with the industry’s 22% fall.