Walgreen Boots: Q3 A Mixed Bag, Achieves $1B In Synergy

On Jul 8, we issued an updated research report on Deerfield, IL-based Walgreens Boots Alliance, Inc. (NASDAQ:WBA) – the world’s first pharmacy-led, health and wellbeing enterprise. The company currently carries a Zacks Rank #3 (Hold).

Walgreens Boots reported a mixed third-quarter fiscal 2016 results with earnings comfortably beating the Zacks Consensus Estimate but revenues falling just shy of the mark. On the brighter side, the company continues to hold a strong cash balance position, which is evident from its increased cash flow reserve in the quarter.

So far, the legacy Walgreens’ partnership with Alliance Boots has yielded positive results, with combined synergies of $330 million in third quarter, totaling $947 million in fiscal 2016 so far. Encouragingly, in Jun 2016, the company was successful in achieving its target of at least $1 billion in combined net synergies from this deal in fiscal 2016.

Currently, Walgreens Boots continues to expect to realize synergies in excess of $1 billion from the Rite Aid deal. In late Oct 2015, the company announced its plan to acquire U.S. retail pharmacy chain – Rite Aid – for a total enterprise value of $17.2 billion, including acquired net debt. As of now, the acquisition process is progressing at a healthy pace and is expected to close in the second half of calendar year 2016.

Earlier, Walgreens Boots had identified additional opportunities for cost savings, which increased the total expected cost savings program by $500 million to a projected $1.5 billion by the end of fiscal 2017. The company is currently on track to achieve this target within the projected time frame.

On the flip side, fewer generic drug introductions and the ongoing generic drug inflation has been hindering Walgreens Boots’ pharmacy margin. In the fiscal third quarter as well, the company’s pharmacy gross margin figures contracted, in line with management’s expectation, on account of ongoing reimbursement pressure and changes in the mix.

Besides, the recent UK referendum and the subsequent exit of Britain from the EU have paved the way for volatility in the market, which in turn might hamper Walgreens Boots’ business in the region. Further, the public bond offering worth $6 billion, which Walgreens Boots issued in Jun 2016 to fund the Rite Aid deal, is sure to increase the company’s long-term liability.

Other Stocks to Consider

Some better-ranked stocks in the medical sector are GW Pharmaceuticals plc (NASDAQ:GWPH) , NuVasive, Inc. (NASDAQ:NUVA) and ICU Medical, Inc. (NASDAQ:ICUI) . While GW Pharmaceuticals and NuVasive sport a Zacks Rank #1 (Strong Buy), ICU Medical holds a Zacks Rank #2 (Buy).