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Diving certificate:

• Walgreens is considering a full sale of its stake in VillageMD after pumping billions of dollars into the unprofitable primary care chain. The decision, announced in a securities filing on Wednesday, is a sharp reversal from the pharmacy giant’s previous commitment to expanding its healthcare offering.
• Walgreens is “currently evaluating various options” given VillageMD’s “significant ongoing and expected future cash needs,” the company said in its 8-K. “These options could include a sale of all or a portion of the VillageMD businesses, potential restructuring options and other strategic opportunities.”
• If Walgreens spins off VillageMD completely, it would be a an evolution of management’s previous plans for the value-based medical chain. In June, Walgreens said it would reduce its stake in VillageMD but would not completely divest it.

Diving insight:

Walgreens initially invested $1 billion in VillageMD in 2020 before investing another $5.2 billion a year later, making Walgreens the majority owner of VillageMD. Walgreens then embarked on a series of mergers and acquisitions to expand VillageMD’s network of physician practices.

But VillageMD was not profitable, which quickly became unacceptable for Walgreens, a company that entered the health care business to bolster flagging operations in its core pharmacy business. Last year, Walgreens began closing VillageMD centers in an effort to return the business to profitability.

That endeavor was unsuccessful: To date, VillageMD has yet to generate a profit on an unadjusted basis. VillageMD’s decline in value accounted for almost all of Walgreens’ $6 billion net loss, according to second-quarter results released in March.

Experts say Walgreens has likely encountered the same problems as other retail giants that have tried to expand their brick-and-mortar stores to reach more Americans who need convenient primary care, including low reimbursement rates and staffing shortages.

VillageMD also failed to repay its debt to the Illinois retailer. According to the filing, Walgreens provided the primary care provider with a nearly $2.3 billion loan early last year, but VillageMD has defaulted on its obligations under the loan agreement.

On Tuesday, Walgreens and VillageMD entered into a forbearance agreement in which Walgreens agreed not to pursue any “legal action” against VillageMD. Walgreens also said it was “actively engaged in discussions with VillageMD shareholders and other third parties regarding the future of its investment,” the filing said.

Walgreens did not respond to a request for comment on which stakeholders or third parties have expressed interest in acquiring Walgreens’ investment.

As part of its strategic turnaround in health care services, Walgreens has divested other health care assets, including stakes in home infusion solutions provider Option Care Health and drug distributor CencoraWalgreens also recently laid off employees and announced plans to close a significant number of low-revenue stores in the United States.

Walgreens shares have fallen more than 59% since the beginning of the year.