Dive Brief:
Walgreens and its top executives are being sued for allegedly breaching their duty to shareholders by inflating the financial outlook for its pharmacy business, in yet another challenge for the beleaguered retail health giant.
Starting last fall, Walgreens CEO Tim Wentworth and CFO Manmohan Mahajan “overstated the Company’s expected revenue for the 2024 Fiscal Year ... [and] falsely and materially claimed confidence in the brand inflation, volume growth, cost execution, discipline, and overall contributions of [Walgreens’] pharmacy division,” reads the lawsuit filed on Tuesday in Illinois district court. The lawsuit also names 10 other high-level executives — and Walgreens board chairman Stefano Pessina — as defendants.
The suit was filed by Mark Tobias, who has held shares in Walgreens since late 2022. Tobias lodged the lawsuit on behalf of shareholders and the company itself, given its directors are not acting in Walgreens’ best interests, according to the complaint. Tobias is asking that Walgreens be awarded damages from the executives, and take steps to improve corporate governance like increasing board oversight.
Dive Insight:
Walgreens is one of the largest retail pharmacy and healthcare companies in the world, but has struggled amid weakening front-of-store sales and lower reimbursement in its core pharmacy business.
The Deerfield, Illinois-based company tried to resuscitate its flagging financial health through offering more direct healthcare services, including by building out its primary care capabilities, but ran into challenges making the initiative profitable.
Tobias’ lawsuit is rooted in comments and earnings guidance Walgreens published in mid-October last year, during the retailer’s shift to care delivery.
On Oct. 12, Walgreens issued 2024 adjusted earnings per share guidance of $3.20 to $3.50.
On a call with investors the same day, Mahajan said Walgreens’ U.S. retail pharmacy business would be able to improve its operating income thanks to “immediate actions to improve the cost base and modest underlying growth in both retail and pharmacy.” Along with cost cuts, Walgreens’ healthcare delivery business should improve profitability by bringing on new patients, among other actions, Mahajan said.
Those statements were misleading, the lawsuit alleges. With them, “defendants veiled the reality: that [Walgreens’] pharmacy division was not actually equipped to adapt to ongoing hurdles within the industry and the Company would instead require significant restructuring in order to create a sustainable model,” Tobias’ complaint reads.
The price of Walgreens’ stock became artificially inflated as a result, the lawsuit alleges.
Then, on June 27, Walgreens slashed its 2024 adjusted earnings per share guidance to $2.80 to $2.95 when announcing its third quarter results.
Walgreens cited “challenging pharmacy industry trends” as the reason behind the cut.
“The current pharmacy model is not sustainable,” Wentworth said during the company’s call with investors. Following the call, Walgreens’ stock fell more than 22% by the end of the day. It has fallen further since.
Walgreens' stock has reached its lowest value since the late 1990s
$WBA price at close, Aug. 29, 2014 - Aug. 29, 2024
From October to June, Walgreens misrepresented its operational success to the public, the lawsuit alleges. In addition, during that time the company repurchased millions of shares of common stock at the inflated price, overpaying by $31.5 million — a breach of their fiduciary duties, according to the complaint.
Walgreens is also facing another federal securities fraud lawsuit pending in front of the same Illinois court. The company did not respond to a request for comment for this story.
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