By Joseph Walker

Not much has gone right for Walgreens Boots Alliance in the past decade.

Customers bought more and more household items online at sites such as Amazon.com, instead of Walgreens's more than 8,000 stores across the U.S. The pharmacy chain inked deals with other drug suppliers and doctor's offices, but stood pat while rivals, including CVS and Express Scripts, merged with big health insurers, gaining control of the medical-reimbursement purse strings that were squeezing pharmacies.

Walgreens cash flow sagged, its debt piled up and shares sank. And on Thursday, Walgreens was sold to private-equity firm Sycamore for $10 billion, down a staggering 91% from its $106 billion peak in 2015.

The storied pharmacy chain -- which became a ubiquitous seller of everything from diabetes injections to nail files as retailers consolidated across the U.S. -- fell after it neglected to keep up with customer preference to buy online and failed to navigate the fierce competition and intense cost pressures of healthcare.

It could shrink more after its sale. Sycamore, a New York-based firm that specializes in retail and consumer investments and, more recently, is better known for smaller deals, is expected to sell off pieces of the business or work with partners to turn it around, The Wall Street Journal reported.

Globally, the transaction ranks as one of the largest leveraged buyouts in the past decade.

Walgreens was founded in 1905, when Chicago druggist Charles R. Walgreen Sr. purchased the store where he worked. By 1929, the company was publicly traded and operated some 525 stores, including locations in New York City and Florida.

Even during the Great Depression, the chain grew thanks in part to innovations such as the malted milk shake, a sweeter version of the original.

Charles "Cork" R. Walgreen III, the founder's grandson who took the helm in the 1970s, helped pioneer the drive-through pharmacy and made placing stores conveniently a corporate priority, clustering retail outlets closely together in dense urban areas to make it as easy as possible to shop at Walgreens.

By last year, 78% of the U.S. population lived within 5 miles of a Walgreens-owned pharmacy.

The chain was a retail juggernaut, its red cursive logo a common sight on city street corners and in suburban shopping centers. Walgreens's power started to diminish in the 21st century.

Walgreens didn't recognize it at first. For years, the company had dangled its thousands of retail locations and loyal customer base to win favorable terms from the powerful firms that pay for patients' prescriptions -- called pharmacy-benefit managers.

In 2011, Express Scripts, one of the biggest PBMs, called its bluff, leading to a nasty public dispute and Walgreens's losing access to millions of customers.

It was a misstep that made investors antsy about Walgreens executive leadership, and created an opening for an Italian billionaire named Stefano Pessina to step into the picture.

Via dealmaking, Pessina, a trained nuclear engineer, had transformed his family's wholesaling business into global healthcare giant Alliance Boots. It operated nearly 2,000 pharmacy stores across the U.K., with an emphasis on personal beauty products.

In 2012, he orchestrated a two-step, multiyear deal to have Walgreens acquire Alliance Boots for more than $10 billion in cash and stock. The combination formed one of the world's largest pharmacy chains. When the merger was completed in late 2014, he became CEO.

Pessina also became the company's largest shareholder, with holdings worth $12 billion.

"It's an American dream come true," Pessina told The Wall Street Journal in 2013. He installed his partner -- now spouse -- Ornella Barra, as Walgreens chief executive of global wholesaling and international retail operations. And he forecast a long, bright future for the historic retailer .

Behind Pessina's confidence was his diagnosis of a bloated and inefficient U.S. health system compared with the government-run systems in Europe. He prescribed combining American and European companies as the antidote, betting he could wring out savings from the consolidation that would drive years of growth.

Even after uniting Walgreens and Boots, the company sought to further expand its pharmacy footprint.

In addition, Walgreens Boots sought to leverage its heft at filling prescriptions through partnerships with the firms that distributed medicines to pharmacies. Under Pessina, Walgreens joined with one of the largest U.S. drug wholesalers, AmerisourceBergen, now known as Cencora. The deal connected the drug supply chains of Europe and the U.S. for the first time.

"So how do [I] see the future of this company?" Pessina told the Journal in a 2019 interview. "I see a future that will extend into the next couple of centuries."

But health insurers and pharmacy-benefit managers, who were responsible for paying for much of Americans' healthcare, were facing pressure to keep a lid on soaring costs. Companies began linking up vertically to make sure they weren't squeezed by the cost-control push.

In the winter of 2018, insurer Cigna bought Express Scripts for $67 billion, and CVS acquired insurer Aetna for $70 billion.

The deals helped protect pharmacies from lower reimbursement rates that health insurers and pharmacy-benefit managers were seeking during contract negotiations.

Walgreens Boots missed out. Pessina pulled off the acquisition of thousands of additional Rite Aid stores, but didn't achieve a purchase of AmerisourceBergen or a tie-up with insurer Humana. The failure to find an insurer parent was, analysts said, a mistake.

"The single biggest issue for Walgreens is pharmacy reimbursement, which in simple terms is they're getting paid less by PBMs and payers every year to dispense the same prescription," said Michael Cherny, a Leerink Partners analyst.

Pessina sought to compensate for Walgreens stores' declining prescription margins by beefing up the "front of the store," where consumers could buy cosmetics and other home goods. More and more customers, however, were buying goods online.

At the back of the stores, meanwhile, Walgreens sought to create the pharmacy of the future, joining with various healthcare providers to offer services that could attract new customers.

There was an ill-fated deal in 2013 to create dozens of Theranos blood-testing clinics in its pharmacies. In 2020, Walgreens made a $1 billion investment in VillageMD, a network of clinics offering primary medical care.

The moves didn't pay off, at least not enough to offset the struggles in its core pharmacy business. In 2021, Pessina stepped down as CEO and was succeeded by Rosalind Brewer, the chief operating officer at Starbucks and a healthcare outsider.

Brewer saw a U.S. pharmacy industry stuck in perpetual low-growth mode, and rivals such as CVS betting big on providing healthcare directly to patients. Walgreens should chase a similar formula, she said, capitalizing on the government's push to pay for how well doctors improve patients' health, not just each X-ray and procedure they perform.

The company would attach more Walgreens stores to its doctors' offices, in hopes that patients would fill their prescriptions at the pharmacy after their doctor visits.

Under Brewer, Walgreens paid $5.2 billion to buy a controlling stake in VillageMD. In 2022, she struck a deal to buy a group of urgent-care centers, including CityMD, for $9 billion.

But the deals added more debt, while failing to stop the damage to Walgreens's pharmacy margins and stock price. She also clashed with Pessina. Making matters worse, the pandemic hit, accelerating patients' shift from bricks-and-mortar retailers to e-commerce websites.

By 2023, Brewer was out, abruptly succeeded by healthcare veteran Tim Wentworth. An enthusiastic leader proud of community-college roots in Rochester, N.Y., Wentworth had worked at the highest levels of the PBM industry for decades, most recently as chief executive of Express Scripts, where he oversaw the company's sale to Cigna.

Wentworth set out to cut costs and return Walgreens back to its roots with a focus on its pharmacy customer experience. He announced plans to close 1,200 stores over three years and to roll back the company's expansion into medical care, by looking to sell its share in VillageMD and explore its options for the rest.

He also sought to renegotiate better contracts with his old insurer colleagues.

A year into Wentworth's stewardship of Walgreens, however, investors didn't give the company credit for its turnaround efforts.

In January, the company said it would suspend its quarterly dividend -- paid for 91 straight years -- because it needs the cash to refinance debt and deal with litigation, including a recent Justice Department lawsuit over the pharmacy's distribution of opioids.

A private-equity deal, in which parts of the company -- including its Boots pharmacies in the U.K. -- would likely be sold off might make it easier to revive the core U.S. retail pharmacy business outside of the spotlight.

Pessina's vision for a cross-continental pharmacy colossus had collapsed. His stake in the company lost $10 billion in value. Now 83 years old, he resides in the tax haven of Monaco.

Write to Joseph Walker at joseph.walker@wsj.com

(END) Dow Jones Newswires

March 06, 2025 23:00 ET (04:00 GMT)

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