Goldman downgrade is a call for Walgreens to revisit biz strategy

Shares of pharmacy store chain Walgreens Boots Alliance Inc. (WBA) dropped sharply Friday after they were downgraded by Goldman Sachs, in what could be an alert against the growing presence of online players like Amazon (AMZN) in the pharma retail space. The price target on the stock was lowered to $68, significantly below Friday’s opening price.

Citing the challenges facing the retail pharmacy business, the research firm cut its rating on Walgreens to sell from neutral. The stock has been on a downward spiral after hitting a three-year high earlier this month. It gained about 10% since the beginning of the year.

Citing the challenges facing the retail pharmacy business, the research firm cut its rating on Walgreens to sell from neutral

Analysts are of the view that the management’s present strategy, marked by business partnerships across multiple sectors, is inadequate to sustain growth. Most of the company’s tie-ups are structured to increase footfall in its stores, which according to the analysts is an ineffective method to counter the growing threat from online drug retailers.

The new rating – the only sell tag on the company currently – could be a dampener as far as investors are concerned. The majority of other market watchers recommends either buy or hold for Walgreens.

The downgrade comes in the midst of hectic merger activity in the sector, which recently witnessed Walgreens’ arch-rival CVS Health (CVS) acquiring Aetna (AET), a leading health insurance firm, and Amazon boosting its online drug delivery service by adding PillPack into its fold.

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Soon after each of the high-value deals involving online retailers, investor sentiment turned bearish causing the stocks of pharma store operators to fall sharply. For Walgreens, the chances of retaining the growth momentum through acquisitions are bleak due to its high debt and unimpressive cash flow.

Adding to the woes of conventional store operators, President Donald Trump recently raised concerns about the high costs of pharmaceutical products including medicine, forcing several companies to slash their prices.

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