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Beth Kaplan steps down at GNC

BY Allison Cerra

PITTSBURGH — General Nutrition Centers announced that its president and chief merchandising officer has resigned.

Beth Kaplan, who served in the role for 3.5 years, is leaving the company to pursue personal interests. As a member of the senior management team, Kaplan helped the company prepare for its recent initial public offering.

The role of president will be reassumed by GNC CEO Joe Fortunato.

"Since Beth arrived at GNC, GNC has developed a world-class management team, particularly in marketing and product development, which is much stronger today than it was when she first arrived," Fortunato said. "We are confident this management team will continue to drive the business without interruption. We are thankful to Beth for her contribution, and wish her well in her future endeavors."

In related news, GNC appointed Amy Lane to serve as a member of its board of directors, replacing Kaplan. Lane, who serves as director for off-price home and fashion apparel conglomerate TJX Cos., also will serve on the board’s audit committee, replacing Norman Axelrod. Axelrod, however, will remain on the board.

"We believe Amy will bring great value to the GNC board," Fortunato said. "She understands the challenges and opportunities of specialty retailing; at the same time, her experience as an investment banker in financing companies and helping senior management implement their growth strategies will be an important resource as we move forward."

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Walgreens’ hard stance against PBM dominates earnings call

BY Michael Johnsen

DEERFIELD, Ill. — Soon after reporting double-digit earnings per share growth Tuesday morning, Walgreens announced it would forego as much as $5.3 billion in annual sales, representing some 7% of the company’s business and 90 million prescriptions, as it walks away from its relationship with pharmacy benefit manager Express Scripts.

Wall Street reacted badly to the news — sales of Walgreens’ stock were down more than 6% to $42 and change in mid-morning trading.

Walgreens suggested negotiations around re-upping its relationship with the PBM broke down several months ago because of exceedingly unfavorable terms — specifically, unacceptable reimbursement rates and a provision that Express Scripts unilaterally could define what constituted a generic without input from Walgreens, a factor that would make it difficult to forecast. “As the largest provider, we no longer felt like a valued partner,” Walgreens president and CEO Greg Wasson told analysts Tuesday morning.

According to Walgreens’ analysis, the news would have had a greater negative impact over the long term than removing the company’s more than 7,900 pharmacies from the PBM’s network in the short term.

“We just can’t accept rates that are less than industry average,” Wasson said, explaining the decision to discontinue Walgreens’ relationship with Express Scripts. He added that it devalues the contribution Walgreens pharmacists and nurse practitioners make to overall health care. “The days of isolating and focusing on drug spend separate from medical costs is coming to an end,” Wasson told analysts.

Community pharmacy increasingly is playing a significant role in holistically reducing total healthcare costs, and this is what forward-looking healthcare plans are looking to implement, Wasson noted.

To that end, Walgreens has brokered several collaborative relationships with a number of hospitals and health systems in the past quarter, all “aimed at improving patient care and providing greater access to important healthcare services while lowering costs.”

In May, Walgreens announced an agreement with Johns Hopkins Medicine designed to promote collaboration on population-based research and to jointly review and develop protocols to improve outcomes of patients with chronic diseases. In addition, JHM and Walgreens together will explore the development of new models for improving care for individuals.

Walgreens also has launched a program with Northwestern Memorial Physicians Group of Chicago, designed to improve patient outcomes and enhance physician decision-making. The program, implemented for Walgreens and Northwestern Memorial employees who have NMPG as their primary care provider, focuses on those with hypertension, diabetes, asthma and hyperlipidemia. Patients with these high-cost chronic diseases will receive point-of-care counseling as part of the integrated services offered. Information from these interactions will be provided to each patient’s primary care physician, giving physicians access to important clinical information from Walgreens.

And Take Care Health Systems, a wholly owned subsidiary of Walgreens, has developed relationships with Ochsner Health System in New Orleans and Memorial in Health of Jacksonville, Fla., through which physician practices will provide information on Take Care Clinics when their own offices are closed or they are unable to schedule an appointment within a patient’s desired time frame.

This isn’t the first time Walgreens has taken a hard stance in PBM negotiations. One year ago, the retailer announced it would terminate its provider relationship with CVS Caremark’s PBM. Two weeks later, Walgreens and CVS Caremark successfully renegotiated that relationship, keeping Walgreens’ pharmacies in the CVS Caremark network. Walgreens executives declined to draw correlations between those contract negotiations with CVS and present-day negotiations with Express Scripts, only saying that “Walgreens is very pleased” with its CVS deal, and the Chicago pharmacy operation continues to work closely with CVS Caremark.

“We’re prepared and ready to live in a world without Express Scripts,” Wasson said. “We’ve heard loud and clear from employers and health plans that they want Walgreens in their network.” Wasson said Walgreens would negotiate directly with employers and health plans.

Of those 90 million prescriptions through Express Scripts, 18% were Tricare/Department of Defense prescriptions, 26% were employers, 11% were Medicare Part D and 45% were managed care.

Walgreens may make up for some of those lost sales next year with continued front-end sales improvements — the company had completed the remodel of 4,000 stores to its new Customer Centric Retailing prototype in early June and is on course to complete 5,500 store remodels by the end of October. Customer satisfaction is up across converted stores, Wasson said. “We believe CCR is being reflected in positive front-end comp numbers,” he said.

Front-end comparable drug store sales increased 3.9% in the quarter ended May 31.

For the third quarter ended May 31, Walgreens reported earnings of $603 million, representing an increase of 30.3%. Net earnings for the first nine months of fiscal 2011 were $1.9 billion, or $2.07 per diluted share, a 26.2% increase from last year’s $1.64 per diluted share.

Third-quarter sales increased 6.8% from the prior-year quarter to $18.4 billion, a quarterly record for the company. Total sales in comparable stores increased 4.1%. “Our comparable-store sales this quarter demonstrated our business was resilient in an ongoing tough economy,” Wasson stated. “We saw healthy increases across our consumables, cough-cold, pain/sleep, personal care and beauty categories, along with continued strength in our private-brand products as we delivered the combination of assortment, accessibility and value relevant to our customers.”

Prescription sales, which accounted for 65.1% of sales in the quarter, climbed 6.4%, while prescription sales in comparable stores increased 4.1%. The company filled 210 million prescriptions, an increase of 5.8% over last year’s third quarter.

Prescriptions filled in comparable stores increased 4.6% in the quarter. The company exceeded by 3.5 percentage points the prescription growth rate of the rest of the industry during the same period, as reported by IMS Health. For the third quarter, Walgreens increased its retail prescription market share to 20.1%.

Customer traffic in comparable stores increased 1.7% for the third quarter, while basket size increased 2.2%.

Gross profit margins increased 50 basis points versus the year-ago quarter to 28.1 as a percentage to sales. Helping overall margins was the positive impact of generic drug sales and higher front-end margins. These increases were offset partially by continued pharmacy reimbursement pressures and an increased LIFO provision of $50 million in this year’s quarter, versus $18 million last year. Total gross profit dollars increased $405 million, or 8.5%, in the quarter, of which 1.5 percentage points was attributable to Duane Reade.

Walgreens opened or acquired 41 new drug stores, representing a net gain of 25 after relocations and closings, in the third quarter. Walgreens expects organic store growth of between 2.5% and 3% in fiscal 2011.

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‘Wining’ down at Walgreens in Brooklyn

BY Alaric DeArment

NEW YORK — Wine with an evening meal outdoors is one of the great pleasures of summer, and with summer officially beginning this week, this Walgreens store in Brooklyn is making sure customers have everything they need.

Many people enjoy a crisp white or sparkling wine on the beach or in their backyards under the hot sun, and this Walgreens’ store on Avenue J in Brooklyn is selling a small array of wines — under New York state law, only officially licensed liquor stores can carry a full selection, though supermarkets have lobbied to change the law — as well as corkers, foil cutters and a handy product for removing red wine stains.

The United States is the world’s largest wine consumer, surpassing even France last year, according to The Wine Institute, a trade group representing California wine producers. Domestic and foreign producers shipped nearly 330 million cases in 2010, a 2% increase over 2009, with a total retail value of $30 billion. This included sparkling wines such as champagne, whose sales fell from 13.8 billion cases in 2007 to 13.8 billion in 2008 before rebounding to 13.9 billion in 2009 and then 15.4 billion in 2010. California white and rosé wines made with such grapes as chardonnay, zinfandel, Riesling and Muscat saw large increases in sales as well, as did red wines with grape varieties, such as pinot noir and cabernet sauvignon.

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