Walgreen (NYSE:WAG) is ranked among the top drugstore chain with in the US. On September 30th the store announced it biggest quarterly and fiscal year sales within the last three years. These results were achieved through continuous growth in business and prescription numbers. Whereas the topline seems to flourish, the gross margins suffer ongoing pressure. These pressures are from higher third party reimbursement, alternations in the business mix regarding Medicare part D, company strategy to have 90 day prescriptions at retail, generic drug inflation and the combination of specialty drugs.
These pressures caused decline in gross margin from 29.2% to 28.2% within a fiscal year. Adjusted gross margin also fell from 27.9% in fourth quarter of 2014 from 28.9% in 2013. Even though pressures have affected the margin growth but the company’s strategy to lower internal costs will help stabilize the damage done in the bottom line. One of the strategies Walgreen (NYSE:WAG) will use after analyzing the shift of deflation in generic drugs costs into inflation, a change that has a direct impact on margins.
As in the last couple of years the market has seen a shift as customers move towards generic drugs. It benefits the company as these drugs are lowered priced but have helped achieve gross margins. But last year, breaking all trends, there was deflation in generic drug costs that led to inflation. This tends to have a negative impact on gross margins. Walgreen (NYSE:WAG) now is trying to minimize this impact by monitoring the AWP (Average Wholesale Price).
Along with some peers, Walgreen (NYSE:WAG) helps to bring out how inflation effects the drug costs and accordingly set payer contacts. Next in line, is the reimbursement rate of US Medicaid and Medicare along with other health insurances providers? The rate it expected to be lowered by in respond to the rising need of generic drugs as well as government pressure. Just last year the medicare payment for doctors and hospitals has fallen 2%, this further impacts margins within the pharmaceutical sphere.
In response to these declines, the companies have reached a conclusion that synergies among new partners will improve the bottom line. AmerisourceBergen has recently joined hands with Walgreen (NYSE:WAG) and Alliance Boots for a ten year partnership. This gives Walgreen (NYSE:WAG) the luxury source generic drug as well as provide means to provide logistical efficiencies. Walgreen (NYSE:WAG) also started a new approach to supply its medicines virtually, be it branded or generic.
By eliminating distributors and only partnering with one ABC, Walgreen (NYSE:WAG) managed to negotiate better prices for both its branded and generic drugs. Another cost eliminating area Walgreen (NYSE:WAG) is focused is to shut down all unprofitable stores. As well as looking into ways to improve efficiencies and providing high quality and cutting cost. In the long run Walgreen (NYSE:WAG) wants to raise $1 billion in cost reduction through incorporating savings within the corporate level and store levels. All these plans are to be put into action by fiscal; 2015.