Item 1. Business
Overview
Walgreen Co., together with its subsidiaries, operates the largest drugstore chain in the United States with net sales of $76.4 billion in the fiscal year ended August 31, 2014. We provide our customers with convenient, omni-channel access to consumer goods and services, pharmacy, and health and wellness services in communities across America. We offer our products and services through drugstores, as well as through mail, telephone, online and our mobile application.
We sell prescription and non-prescription drugs as well as general merchandise, including convenience and fresh foods, household items, personal care, photofinishing and beauty care. Our pharmacy, health and wellness services include retail, specialty, infusion and respiratory services, mail service, convenient care clinics and wellness centers. These services help improve health outcomes for patients and manage costs for payers including employers, managed care organizations, health systems, pharmacy benefit managers and the public sector. Our Take Care Health Systems subsidiary is a manager of in-store convenient care clinics (Healthcare Clinics), with more than 400 locations throughout the United States. In fiscal 2014, we sold a controlling interest in the Take Care Employer Solutions, LLC (Take Care Employer) business and now hold an equity investment in the business. See the "Business Development" section below for further details.
On August 2, 2012, we acquired a 45% equity interest in Alliance Boots GmbH (Alliance Boots), a leading international pharmacy-led health and beauty group, which we account for using the equity method of accounting. Alliance Boots delivers a range of products and services to customers including pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution. As part of the initial 45% investment in Alliance Boots, we also acquired the right, but not the obligation, to elect to acquire the remaining 55% interest in Alliance Boots (the second step transaction), at any time during the period beginning February 2, 2015 and ending on August 2, 2015, in exchange for £3.133 billion in cash, payable in British pounds sterling, and 144,333,468 shares of Walgreens common stock, subject to certain specified potential adjustments (the call option). On August 5, 2014, the Purchase and Option Agreement dated June 18, 2012 was amended (as amended, the Purchase and Option Agreement) to permit the exercise of the call option beginning on that date, and we, through an indirectly wholly-owned subsidiary to which we previously assigned our rights to the call option, exercised the call option on August 5, 2014, as described under "Business Development" below.
In addition, we plan to complete, immediately prior to the completion of the second step transaction, a reorganization of Walgreens into a holding company structure (the Reorganization and together with the second step transaction and the related share issuance, the Transactions), under which Walgreens would become a wholly-owned subsidiary of a new Delaware corporation named "Walgreens Boots Alliance, Inc." (Walgreens Boots Alliance) and Walgreen Co. shareholders immediately prior to the Reorganization would become shareholders of Walgreens Boots Alliance, with shares of Walgreen Co. common stock being converted automatically into shares of Walgreens Boots Alliance common stock on a one-for-one basis. The Reorganization is conditioned upon the second step transaction being completed immediately following the completion of the Reorganization. The second step transaction is not conditioned on the completion of the Reorganization. Closing of the Transactions is subject to shareholder and various regulatory approvals and is expected to occur in the first quarter of calendar 2015.
Walgreen Co. was incorporated as an Illinois corporation in 1909 as a successor to a business founded in 1901. Our principal executive offices are located at 108 Wilmot Road, Deerfield, Illinois 60015. The Company is principally in the retail drugstore business and its operations are within one reportable segment.
Business Development
As of August 31, 2014, Walgreens operated 8,309 locations in 50 states, the District of Columbia, Puerto Rico and U.S. Virgin Islands. In 2014, the Company opened or acquired 268 locations. Acquisitions included Kerr Drug, which contributed 76 drugstore locations as well as a specialty pharmacy and a distribution center. In 2014, the Company had a net reduction of 273 locations primarily due to the sale of the Take Care Employer business, which consisted primarily of worksite locations, and the Company's plan to close underperforming drugstores. Total locations as of August 31, 2014 do not include 437 Healthcare Clinics and 48 worksite pharmacies that are operated primarily within our Walgreens drugstores or locations of unconsolidated partially owned entities such as Alliance Boots.
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Number of Locations
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Location Type
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2014
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2013
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2012
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Drugstores
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8,207
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8,116
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7,930
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Health and Wellness Centers
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-
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371
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366
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Infusion and Respiratory Services Facilities
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91
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82
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76
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Specialty Pharmacies
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9
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11
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11
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Mail Service Facilities
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2
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2
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2
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Total
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8,309
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8,582
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8,385
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Walgreens is committed to providing the most convenient omni-channel access to consumer goods and services, and pharmacy, health and wellness services through our 8,207 community based drugstores, as well as through our specialty pharmacy, home infusion and respiratory services and retail clinic businesses. As of August 2014, approximately 76% of the United States population lived within five miles of a Walgreens and an average of 6.2 million shoppers visited our stores daily in fiscal 2014. In addition to store traffic, our websites, including Walgreens.com and drugstore.com, received an average of approximately 59.7 million visits per month in fiscal 2014. Integrated with our e-commerce platform, the Walgreens mobile application allows shoppers to refill prescriptions through scan technology, receive text messages alerting when a refill is due and other front-end functionality of our photo features and shopping features. Our loyalty program, Balance
®
Rewards, is designed to reward our most valuable customers and encourage shopping in stores and online and allows customers the opportunity to earn points for purchasing select merchandise in addition to receiving special pricing on select products when shopping with a rewards card. Customers have the ability to instantly redeem rewards at our stores or through Walgreens.com. We had 82 million Balance
®
Rewards active members as of August 31, 2014.
We seek to grow pharmacy, front-end and online market share through new store growth, comparable store sales increases, pharmacy prescription file purchases and strategic acquisitions. When evaluating strategic acquisitions and investment opportunities that meet our long-term growth objectives, consideration is given to retail, health and well-being enterprises and other acquisitions and investments that provide unique opportunities and fit our business objectives. In fiscal 2014, we
acquired certain assets of Kerr Drug
, which included 76 retail drugstores, as well as a specialty pharmacy business and a distribution center all based in North Carolina.
Significant acquisitions in the prior year include
Stephen L. LaFrance Holdings, Inc. (USA Drug), which included 141 drugstore locations operating under the USA Drug, Super D Drug, May's Drug, Med-X and Drug Warehouse names. Additionally, the Company acquired an 80% interest in Cystic Fibrosis Foundation Pharmacy LLC, an investment which provides joint ownership in a specialty pharmacy for cystic fibrosis patients and their families and a provider of new product launch support and call center services for drug manufacturers.
On August 2, 2012, we acquired a 45% equity interest in Alliance Boots and a call option that provided Walgreens the right, but not the obligation, to elect to purchase the remaining 55% interest in Alliance Boots in the second step transaction, at any time during the period beginning February 2, 2015 and ending on August 2, 2015, in exchange for £3.133 billion in cash, payable in British pounds sterling, and 144,333,468 shares of Walgreens common stock, subject to certain specified potential adjustments set forth in the Purchase and Option Agreement. On August 5, 2014, the Purchase and Option Agreement was amended to permit the exercise of the call option beginning on that date, and Walgreens, through an indirectly wholly-owned subsidiary to which it previously assigned its rights to the call option, exercised the call option on August 5, 2014. In certain limited circumstances, Walgreens may be required to make the entire second step transaction payment in cash. In addition, in certain specified cases, if the second step transaction does not close, Walgreens may be required to return a 3% interest in Alliance Boots in exchange for a nominal amount. Additional information regarding our investment in Alliance Boots and the pending second step transaction is available in our and Walgreens Boots Alliance's filings with the Securities and Exchange Commission (the SEC), including our Form 8-K filed on May 15, 2014 that includes Alliance Boots' audited consolidated financial statements and accompanying notes (prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS) and audited in accordance with auditing standards generally accepted in the United States (U.S. GAAS)), including the statements of financial position at March 31, 2014 and 2013 of Alliance Boots and its subsidiaries (the Group), and the related Group income statements, Group statements of comprehensive income, Group statements of changes in equity and Group statements of cash flows for each of the years in the three-year period ended March 31, 2014, and our Form 8-K filed on September 16, 2014 that discloses certain unaudited pro forma consolidated financial information related to the pending Transactions.
We plan to complete, immediately prior to the completion of the second step transaction, the Reorganization of Walgreens into a holding company structure, under which Walgreens would become a wholly-owned subsidiary of a new Delaware corporation named "Walgreens Boots Alliance, Inc." and Walgreen Co. shareholders immediately prior to the Reorganization would become shareholders of Walgreens Boots Alliance, with shares of Walgreen Co. common stock being converted automatically into shares of Walgreens Boots Alliance common stock on a one-for-one basis. The Reorganization is conditioned upon the second step transaction being completed immediately following the completion of the Reorganization. The second step transaction is not conditioned on the completion of the Reorganization. If the Reorganization is completed, Walgreens Boots Alliance, immediately following the completion of the Reorganization, will issue, in a private placement, shares of Walgreens Boots Alliance common stock to the sellers of the 55% of Alliance Boots that Walgreens does not own as of the date of this report (collectively, the Sellers) in connection with the second step transaction and if the Reorganization is not completed, Walgreens will issue, in a private placement, shares of Walgreens common stock to the Sellers in connection with the second step transaction. Closing of the Transactions is subject to shareholder and various regulatory approvals and is expected to occur in the first quarter of calendar 2015.
Walgreens equity earnings, initial investment and the call option exclude the Alliance Boots minority interest in Galenica Ltd. (Galenica). The Alliance Boots investment in Galenica was distributed to the Alliance Boots shareholders other than Walgreens during May 2013, which had no impact to the Company. We account for our 45% investment in Alliance Boots using the equity method of accounting. Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities. Net income reported by Alliance Boots is translated from British pounds Sterling at the average rate for the period. We utilize a three-month lag in reporting equity income from our investment in Alliance Boots, reported as equity earnings in Alliance Boots on the Consolidated Statements of Earnings. The investment is recorded as Equity investment in Alliance Boots in the Consolidated Balance Sheets. See "Description of Business-Overview of Alliance Boots" below for additional information. Upon closing of the second step transaction, the financial results of Alliance Boots will be fully consolidated into our consolidated financial statements. The timing of the closing of the second step transaction and the length of the reporting lag, if any, we use to report the results of Alliance Boots after the closing of the second step transaction are expected to impact our reported financial results in fiscal 2015. An earlier closing and/or shorter reporting lag would increase, and a later closing would decrease, the extent to which fully consolidated Alliance Boots results would be reflected in our consolidated fiscal 2015 financial statements.
On March 19, 2013, the Company, Alliance Boots and AmerisourceBergen Corporation (AmerisourceBergen) announced various agreements and arrangements, including a ten-year pharmaceutical distribution agreement between the Company and AmerisourceBergen pursuant to which the Company will source branded and generic pharmaceutical products from AmerisourceBergen; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between the Company and Alliance Boots; and agreements and arrangements pursuant to which the Company and Alliance Boots together have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen and gain associated representation on AmerisourceBergen's board of directors in certain circumstances. The distribution agreement resulted in the distribution by AmerisourceBergen of branded pharmaceutical products that Walgreens historically had sourced from distributors and suppliers, effective September 1, 2013. In the second quarter of the current fiscal year, AmerisourceBergen began distributing generic pharmaceutical products that we previously self-distributed, and that transition was substantially complete by the end of fiscal 2014.
On June 25, 2014, the Company completed the sale of a majority interest in its subsidiary, Take Care Employer Solutions, LLC (Take Care Employer) to Water Street Healthcare Partners (Water Street). At the same time, Water Street made an investment in CHS Health Services (CHS), an unrelated entity and merged CHS with Take Care Employer to create a leading worksite health company dedicated to improving the cost and quality of employee health care. Water Street owns a majority interest in the new company while Walgreens owns a significant minority interest and has representatives on the new company's board of directors. The Company recorded an immaterial gain on the transaction.
We utilize our extensive retail network as a channel to provide affordable quality health and wellness services to our customers and patients, as illustrated by our ability to play a significant role in providing flu vaccines and other immunizations. We market our products and services to employers, governments, managed care organizations and pharmacy benefit managers, expanding beyond our traditional retail consumer model to contract directly with our payers. Through our more than 70,000 health care providers including pharmacists, pharmacy technicians, nurse practitioners and other health related professionals, Walgreens expects to continue to play a growing role in government and employer efforts to control escalating health care costs.
Prescription sales continued to be a large portion of the Company's business. In fiscal 2014, prescriptions accounted for 64.2% of sales compared to 62.9% in fiscal 2013. Third party sales, where reimbursement is received from managed care organizations, government and private insurance, were 96.5% of fiscal 2014 prescription sales which increased slightly from 95.8% in fiscal 2013. Overall, Walgreens filled approximately 699 million prescriptions in fiscal 2014, an increase of 16 million, or 2.4%, from fiscal 2013. Adjusted to 30-day equivalents, prescriptions filled were 856 million in fiscal 2014 and 821 million in fiscal 2013. Walgreens accounted for 19.0% of the U.S. retail prescription drug market in fiscal 2014 compared to 18.7% in fiscal 2013. Walgreens expects the aging population and the continued development of innovative drugs that improve quality of life and control health care costs will continue to drive demand for prescription drugs.
During fiscal 2014, the Company added $1.1 billion to property and equipment, primarily related to store improvements. Capital expenditures for fiscal 2015 are currently expected to be $1.7 billion, excluding acquisitions and prescription file purchases, although the actual amount may vary depending upon a variety of factors, including, among other things, the timing of implementation of certain capital projects and the closing of the second step transaction.
We plan to continue pursuing our goal to become a global leader in pharmacy, health and well-being solutions and the first choice for health and daily living in communities we serve, all designed to help our customers get, stay and live well. Our strategies are designed to further transform our traditional drugstore into a "retail health and daily living" store, creating community-centric healthcare integration with expanded pharmacy, health and wellness solutions. We seek to continue to deliver an outstanding customer experience through enhanced employee engagement and to expand our product and service offerings across new channels and markets where, in addition to our stores, customers and patients can utilize our health system pharmacies, Walgreens.com, mobile applications and social media sites.
Description of Business
Principal products produced and services rendered
The Company's drugstores are engaged in the retail sale of prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, convenience and fresh foods, household items, personal care, beauty care, photofinishing and candy. Prescription drugs represent the Company's largest product class, followed by general merchandise and non-prescription drugs. In fiscal 2014, 2013 and 2012, prescription drugs represented 64%, 63% and 63% of total sales, respectively, general merchandise represented 26%, 27% and 25% of total sales, respectively, and non-prescription drugs represented 10%, 10% and 12% of total sales, respectively. Customers may place orders by phone or online including through our mobile application and have the choice to have prescriptions filled at the drugstore as well as through the mail.
We offer pharmacy, health and wellness solutions which include retail, specialty pharmacy, infusion and respiratory services, mail service and convenient care clinics. Our drugstores sell prescription and non-prescription drugs and our pharmacists also provide drug consultations and administer flu vaccines and other immunizations. Our integrated network of pharmacies allows easy access for customers to fill their prescriptions at any of our drugstores. In addition, our stores sell branded and owned brand general merchandise. Take Care Health Systems, a wholly-owned subsidiary, manages the Healthcare Clinics at select Walgreens throughout the country. Patient care at each of the Healthcare Clinics is provided by independently owned state professional corporations doing business as Take Care Health Services. Nurse practitioners and physician assistants treat patients and are licensed to write prescriptions that can be filled at the patient's pharmacy of choice and to administer immunizations and other vaccines.
We offer specialty pharmacy services that provide customers nationwide access to a variety of medications, services and programs for managing complex and chronic health conditions. Medications delivered to these customers often require special handling, are only available through limited distributions or involve a time-sensitive delivery. Specialty pharmacy patients typically require customized treatments in managing their medical conditions.
In addition, we offer our customers infusion therapy services including the administration of intravenous (IV) medications for cancer treatments, chronic pain, heart failure, and other infections and disorders which must be treated by IV. Walgreens provides these infusion services at home, at the workplace, in a physician's office or at a Walgreens alternate treatment site. We also provide clinical services such as laboratory monitoring, medication profile review, nutritional assessments and patient and caregiver education.
Many customers choose to have their prescriptions refilled through our mail service which allows customers to submit prescription refill requests online, over the phone or through e-prescribing. Our advanced pharmacy system offers pharmacists easy access to patient prescription records, which allows access to refills and emergency supplies at any of our pharmacies, eases prescription transfers, and enables any Walgreens pharmacist to provide ongoing treatment consultation.
Customers also have access to our ecommerce solutions, which, through the walgreens.com and drugstore.com websites, including beauty.com and visiondirect.com, offer certain products available only online as well as most products available in Walgreens drugstores. Our mobile applications also allow customers to refill prescriptions through their mobile device, download weekly promotions and find the nearest Walgreens drugstore in addition to other features that are designed to enhance the user's experience.
Sources and availability of raw materials
Inventories are purchased from numerous domestic and foreign suppliers. We do not believe that the loss of any one supplier or group of suppliers under common control would have a material adverse effect on the Company's business.
Intellectual property and licenses
We market products and services under various trademarks, trade dress and trade names and rely on a combination of patent, copyright, trademark, service mark, and trade secret laws, as well as contractual restrictions to establish and protect our proprietary rights. We own numerous domain names, hold over 75 patents, have registered numerous trademarks, and have filed applications for the registration of a number of our other trademarks and service marks in various jurisdictions. We hold assorted business licenses (such as pharmacy, occupational, liquor and cigarette) having various lives within multiple legal jurisdictions, which are necessary for the normal operation of our business.
Seasonal variations in business
Our business is seasonal in nature, with the second fiscal quarter generating a higher proportion of front-end sales and earnings than other periods. Both prescription and non-prescription drug sales are affected by the timing and severity of the cough, cold and flu season. See the section captioned "Summary of Quarterly Results (Unaudited)" in Part II, Item 8 of this Form 10-K.
Working capital practices
The Company generally finances its inventory and expansion needs with internally generated funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Form 10-K.
Customers
The Company sells to numerous customers including various managed care organizations within both the private and public sectors. No customer accounted for ten percent or more of the Company's consolidated net sales in fiscal 2014.
Government contracts
The Company fills prescriptions for many state Medicaid public assistance plans. Revenues from all such plans were approximately 4.9% of total sales in fiscal 2014.
Regulation
Our business is subject to federal, state and local laws, regulations, and administrative practices concerning the provision of and payment for health care services, including, without limitation: federal, state and local licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy; Medicare, Medicaid and other publicly financed health benefit plan regulations prohibiting kickbacks, beneficiary inducement and the submission of false claims; the Health Insurance Portability and Accountability Act (HIPAA); the Patient Protection and Affordable Care Act (ACA); and regulations of the U.S. Food and Drug Administration, the U.S. Federal Trade Commission, the U.S. Drug Enforcement Administration and the U.S. Consumer Product Safety Commission, as well as regulations promulgated by comparable state agencies concerning the sale, advertisement and promotion of the products we sell.
We are also governed by federal and state laws of general applicability, including laws regulating matters of working conditions, health and safety and equal employment opportunity. In connection with the operation of our stores, distribution centers and other sites, we are subject to laws and regulations relating to the protection of the environment and health and safety matters, including those governing exposure to, and the management and disposal of, hazardous substances. Federal, state and local environmental protection requirements did not have a material effect on capital expenditures, earnings or the competitive position of the Company in fiscal 2014. In addition, as we increase our activities in markets outside the United States, we are, and expect to be, subject to an increasing number of foreign laws and regulations, including retail and wholesale pharmacy, licensing, tax, foreign trade, intellectual property, privacy and data protection, currency, political and other business restrictions and requirements and local laws and regulations.
Competitive conditions
The drugstore industry is highly competitive. As a leader in the retail drug industry and as a retailer of general merchandise, Walgreens competes with various retailers, including chain and independent drugstores, mail order prescription providers, grocery stores, convenience stores, mass merchants, online pharmacies and retailers, warehouse clubs, dollar stores and other discount merchandisers. The Company competes primarily on the basis of service, convenience, variety and price. The Company's geographic dispersion helps offset the impact of temporary, localized economic and competitive conditions in individual markets. The number and location of the Company's drugstores appears under Item 2 – "Properties" in this Form 10-K.
Employees
At August 31, 2014, the Company employed approximately 251,000 persons, approximately 76,000 of whom were part-time employees working less than 30 hours per week. The foregoing does not include employees of unconsolidated partially owned entities, such as Alliance Boots, of which we owned 45% as of the date of this report.
Research and development
The Company does not engage in any material research and development activities.
Overview of Alliance Boots
Walgreens acquired a 45% equity interest in Alliance Boots GmbH on August 2, 2012 along with a call option to acquire the remaining 55% equity interest during the six-month period beginning February 2, 2015 (the first step transaction). On August 5, 2014, the Purchase and Option Agreement was amended to permit the exercise of the call option beginning on that date, and we, through an indirectly wholly-owned subsidiary to which we previously assigned our rights to the call option, exercised the call option on August 5, 2014, as described above. Completion of the second step transaction is subject to shareholder and various regulatory approvals and is expected to occur in the first quarter of calendar 2015. We account for our 45% investment in Alliance Boots using the equity method of accounting on a three-month lag basis. Accordingly, because of the three-month lag and the timing of the closing of the first step transaction on August 2, 2012, our financial statements for the fiscal year ended August 31, 2013 reflect 12 months of the dilutive effect of the incremental shares and interest expense associated with our Alliance Boots investment, but only 10 months (August 2012 through May 2013) of Alliance Boots results, reported as Equity earnings in Alliance Boots. Our financial statements for the fiscal year ended August 31, 2014 reflect Alliance Boots results for the 12 months ending May 31, 2014, reported as Equity earnings in Alliance Boots.
Alliance Boots is a leading international, pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution business. As of August 31, 2014, Alliance Boots had, together with its associates and joint ventures, pharmacy-led health and beauty retail businesses in 11 countries and operated more than 4,600 health and beauty retail stores, of which more than 4,450 had a pharmacy, with a growing online presence. In addition, as of March 31, 2014, its fiscal year end, Alliance Boots had approximately 600 optical practices in the United Kingdom, approximately 180 of which operated on a franchise basis. Approximately 30% of its optical practices are located in Boots stores with the balance being standalone practices. In addition, Alliance Boots is a leader in the United Kingdom hearingcare market through its associate, Boots Hearingcare, which operated in approximately 430 locations across the United Kingdom, almost all of which are within Boots stores or standalone Boots Opticians practices. Its pharmaceutical wholesale businesses, together with its associates and joint ventures, supplied medicines, other healthcare products and related services to more than 180,000 pharmacies, doctors, health centers and hospitals from more than 370 distribution centers in 20 countries. Except as otherwise indicated, figures regarding Alliance Boots business activities are as of March 31, 2014, with the addition of Farmacias Ahumada S.A. data at the date of its acquisition by Alliance Boots on August 11, 2014, and include its associates and joint ventures.
Pharmacy-led Health and Beauty Retailing.
Alliance Boots is a market leader in the pharmacy industry with stores located in the United Kingdom, Norway, the Republic of Ireland, The Netherlands, Mexico, Chile, Thailand and Lithuania and through its associates and joint ventures in China, Italy and Croatia. In addition, as of March 31, 2014, there were approximately 80 Boots branded stores operated in the Middle East on a franchised basis. Alliance Boots seeks to locate its stores in convenient locations and to put pharmacists at the heart of healthcare. Alliance Boots pharmacists are well placed to provide a significant role in the provision of healthcare services, working closely with other primary healthcare providers in the communities they serve. Alliance Boots principal retail brand in its Health & Beauty Division is Boots, which Alliance Boots trades under in the United Kingdom, Norway, the Republic of Ireland, The Netherlands and Thailand. The Boots offering is differentiated from that of competitors due to a number of factors including the product brands that Alliance Boots owns and "only at Boots" exclusive products.
Pharmaceutical Wholesaling and Distribution.
Alliance Boots pharmaceutical wholesaling and distribution businesses seek to provide high core service levels to pharmacists in terms of frequency of delivery, product availability, delivery accuracy, timeliness and reliability at competitive prices. Alliance Boots also offers its customers added-value services that help pharmacists develop their own businesses. This includes membership in Alphega Pharmacy, Alliance Boots pan-European network for independent pharmacies. Alphega Pharmacy had a membership of more than 4,800 pharmacies in seven countries as of March 31, 2014. This is expected to increase following the March 2014 vote by the vivesco pharmacy network in Germany, which has approximately 950 members, to rebrand as Alphega. In addition to the wholesale of medicines and other healthcare products, Alliance Boots provides services to pharmaceutical manufacturers who are increasingly seeking to gain greater control over their product distribution, while at the same time outsourcing non-core activities. These services include pre-wholesale and contract logistics, direct deliveries to pharmacies, and specialized medicine delivery including related home healthcare.
Product Brands.
In its Health & Beauty Division, Alliance Boots has product brands such as No7, Soltan and Botanics, together with newer brands such as Boots Pharmaceuticals and Boots Laboratories. Alliance Boots is seeking to continue to internationalize its key product brands, selling them through select retail partners, its own and third party internet shopping sites, and independent pharmacies. In the United States, where Boots product brands have been sold through Target for many years, Alliance Boots is, in addition, introducing No7 and other key Boots product brands into the drugstore channel through certain Walgreens stores on a phased basis. In Europe, its Boots Laboratories line of products was sold by independent pharmacies in five countries as of March 31, 2014. In addition, Alliance Boots has partnerships with a select number of third party brand owners to sell their products in Boots stores on an exclusive basis, sharing in the future brand equity. Alliance Boots also continues to manufacture a significant proportion of its most popular own brand and exclusive products. Through its Pharmaceutical Wholesale Division and associates, Alliance Boots currently sells Almus, its line of generic medicines, in five countries and Alvita, its line of patient care products, in six countries.
Financial Information about Foreign and Domestic Operations and Export Sales
All Company sales during the last three fiscal years occurred within the United States, Puerto Rico, Guam and the U.S. Virgin Islands. There were no export sales. We account for our 45% investment in Alliance Boots, described under "Overview of Alliance Boots" above, using the equity method of accounting on a three-month lag basis, as described in Note 5 to the Company's Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. As a result, no Alliance Boots sales are included in the net sales reported by the Company in its consolidated financial statements.
Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for the Company's share of the net income or loss and cash contributions and distributions to or from these entities. The Company's investment in Alliance Boots was recorded as an asset with a $7.2 billion aggregate value on the Company's August 31, 2014 balance sheet, which represented 29.1% of the Company's long-lived assets as of that date. Because the Company's investment in Alliance Boots is denominated in a foreign currency (British pounds Sterling), translation gains or losses impact the value of the investment. See Note 5 to the Company's Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.
Available Information
We file with the Securities and Exchange Commission our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, proxy statements and registration statements. You may read and copy any material we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically. We make available free of charge on or through our website at investor.walgreens.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file or furnish them to the SEC. The contents of the Company's website are not, however, a part of this Form 10-K or the Company's other SEC filings.
Item 1A.
Risk Factors
In addition to the other information in this report and our other filings with the SEC, you should carefully consider the risks described below, which could materially and adversely affect our business, financial condition and results of operations. These risks are not the only risks that we face. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risks Relating to Existing Business
Reductions in third party reimbursement levels, from private or government plans, for prescription drugs could reduce our margin on pharmacy sales and could have a significant adverse effect on our profitability. In addition, a shift in pharmacy mix toward lower margin plans and programs could adversely affect our profitability.
The substantial majority of the prescriptions we fill are reimbursed by third party payers, including private and governmental payers. The continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies, government entities, and other third party payers to reduce prescription drug costs and pharmacy reimbursement rates, as well as litigation relating to how drugs are priced, may adversely impact our profitability. Plan changes with rate adjustments often occur in January and our reimbursement arrangements may provide for rate adjustments at prescribed intervals during their term. In addition, some of these entities may offer pricing terms that we may not be willing to accept or otherwise restrict our participation in their networks of pharmacy providers. Certain provisions of the Deficit Reduction Act of 2005 (the DRA) sought to reduce federal spending by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs (AMP). While those reductions did not go into effect, the ACA, which was signed into law on March 23, 2010, enacted a modified reimbursement formula for multi-source drugs. The modified formula, when implemented, is expected to reduce Medicaid reimbursements, which could adversely affect our revenues and profits. There have also been a number of other recent proposals and enactments by the federal government and various states to reduce Medicare Part D and Medicaid reimbursement levels in response to budget deficits. We expect other similar proposals in the future.
In addition, a shift in the mix of pharmacy prescription volume toward programs offering lower reimbursement rates could adversely affect our profitability. We experienced a shift in pharmacy mix toward 90-day at retail in fiscal 2014 and expect that trend to continue in fiscal 2015. Our 90-day at retail offering for patients with chronic prescription needs typically is at a lower margin than comparable 30-day prescriptions. Additionally, we decided to accept lower reimbursement rates in order to secure preferred relationships with Medicare Part D plans serving senior patients with significant pharmacy needs. Because our Medicare Part D reimbursement rates will decrease in calendar year 2015, if we are not able to generate additional prescription volume and other business from patients participating in these programs sufficient to offset the impact of lower reimbursement, our gross profit will be adversely affected.
Our profitability can be significantly adversely affected by a decrease in the introduction of new brand name and generic prescription drugs.
Our sales and profit margins can be adversely affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically results in relatively lower sales revenues, but higher gross profit margins. Accordingly, a decrease in the number of significant new brand name drugs or generics successfully introduced could adversely affect our results of operations.
Generic drug inflation could have a significant adverse effect on our profitability.
Overall increases in the amounts we pay to procure generic drugs, commonly referred to as generic drug inflation, could have a significant adverse effect on our profitability. In addition, our gross profit margins would be adversely affected by continued generic inflation to the extent we are not able to offset such cost increases. We experienced a shift from historical patterns of deflation in generic drug costs to inflation in fiscal 2014. During fiscal 2014, we experienced cost increases on a subset of generic drugs and in some cases these increases have been significant. We expect this generic inflation to continue in fiscal 2015. Our existing reimbursement arrangements with payers generally provide us with only limited protection against cost increases in our generic drug procurement costs. We are seeking to address this through changes in our contracting strategies and negotiations with our vendors and payers. We cannot assure you that we will be able to mitigate the impact of increased inventory acquisition costs, in whole or in part. Failure to fully offset any such increased prices and costs or to modify our activities to mitigate the impact could have a significant adverse effect on our gross profit margins.
We derive a significant portion of our sales from prescription drug sales reimbursed by pharmacy benefit management companies.
We derive a significant portion of our sales from prescription drug sales reimbursed through prescription drug plans administered by pharmacy benefit management (PBM) companies. PBM companies typically administer multiple prescription drug plans that expire at various times and provide for varying reimbursement rates. There can be no assurance that we will continue to participate in any particular pharmacy benefit manager network in any particular future time period. If our participation in the prescription drug programs administered by one or more of the large PBM companies is restricted or terminated, we expect that our sales would be adversely affected, at least in the short term. If we are unable to replace any such lost sales, either through an increase in other sales or through a resumption of participation in those plans, our operating results may be materially adversely affected. For example, we were not part of the pharmacy provider network of Express Scripts, Inc., one of the largest PBMs, for more than eight months in 2012, which led most patients in plans administered by Express Scripts that we formerly served to transition to a new pharmacy and caused us to lose significant sales and adversely affected our operating results. When we exit a pharmacy provider network and later resume network participation, there can be no assurance that we will achieve any particular level of business on any particular pace. In addition, in such circumstances we may incur increased marketing and other costs in connection with initiatives to regain former patients and attract new patients covered by in-network plans. When we exit a pharmacy provider network and later resume network participation, there also can be no assurance that all clients of the PBM sponsor of the network will choose to include us again in their pharmacy network initially or at all. For example, after we agreed with Express Scripts to again become part of the broadest network of pharmacies available to Express Scripts clients as of September 15, 2012, the United States Department of Defense TRICARE program, an Express Scripts client, announced that Walgreens would continue to be designated as a non-network pharmacy provider for TRICARE beneficiaries.
Consolidation and strategic alliances in the healthcare industry could adversely affect our business, competitive positioning, financial condition and results of operations.
Many organizations in the healthcare industry, including pharmacy benefit managers, have consolidated in recent years to create larger healthcare enterprises with greater bargaining power, which has resulted in greater pricing pressures. For example, in April 2012, two of the three largest pharmacy benefit managers, Medco Health Solutions, Inc. and Express Scripts, Inc., merged. The resulting entity is the largest pharmacy benefit manager in the United States. If this consolidation trend continues, it could give the resulting enterprises even greater bargaining power, which may lead to further pressure on the prices for our products and services. If these pressures result in reductions in our prices, our business will become less profitable unless we are able to achieve corresponding reductions in costs or develop profitable new revenue streams. Strategic alliances in the healthcare industry also impact our business and competitive positioning. For example, following the announcement of our agreement with AmerisourceBergen providing for, among other things, generic drug purchasing by Walgreens, Alliance Boots and AmerisourceBergen through the Walgreens Boots Alliance Development GmbH global sourcing joint venture, two of our retail pharmacy competitors subsequently established relationships with other pharmaceutical drug wholesalers relating to generic drug procurement. In addition, further consolidation among generic drug manufacturers could lead to increased generic drug inflation in the future. We expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements, and societal pressures will continue to cause the healthcare industry to evolve, potentially resulting in further business consolidations and alliances among the industry participants we engage with, which may adversely impact our business, financial condition and results of operations.
From time to time, we make investments in companies over which we do not have sole control, including our investment in Alliance Boots and our investment in AmerisourceBergen. Some of these companies may operate in sectors that differ from our current operations and have different risks.
From time to time, we make debt or equity investments in other companies that we may not control or over which we may not have sole control. For example, we own only 45% of the outstanding Alliance Boots equity interests as of the date of this report. While we have the right to appoint four designees to serve on the Alliance Boots Board of Directors and veto rights over certain significant Alliance Boots actions under the terms of our shareholders agreement with them, we do not have the ability to control day-to-day operations of that company. Similarly, while we and Alliance Boots have the right, but not the obligation, to invest in AmerisourceBergen common stock and to designate up to two members of the AmerisourceBergen board of directors in certain circumstances if we achieve specified ownership milestones, we do not and will not have the ability to control day-to-day operations of that company. Although the businesses in which we have made non-controlling investments generally have a significant health and daily living or prescription drug component, some of them operate in businesses that are different from our primary lines of business. Investments in these businesses, among other risks, subject us to the operating and financial risks of the businesses we invest in and to the risk that we do not have sole control over the operations of these businesses. From time to time, we may make additional investments in or acquire other entities that may subject us to similar risks. Investments in entities over which we do not have sole control, including joint ventures and strategic alliances, present additional risks such as having differing objectives from our partners or the entities in which we invest, or becoming involved in disputes, or competing with those persons. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us.
We use a single wholesaler of branded and generic pharmaceutical drugs as our primary source of such products. A disruption in this relationship could adversely affect our business and financial results.
On March 19, 2013, the Company, Alliance Boots and AmerisourceBergen announced various agreements and arrangements, including a ten-year pharmaceutical distribution agreement between Walgreens and AmerisourceBergen pursuant to which we will source branded and generic pharmaceutical products from AmerisourceBergen; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between Walgreens and Alliance Boots; and agreements and arrangements pursuant to which we and Alliance Boots together have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen and gain associated representation on AmerisourceBergen's board of directors in certain circumstances. AmerisourceBergen began to distribute all branded pharmaceutical products that we historically sourced from distributors and suppliers, effective September 1, 2013. In the second quarter of fiscal 2014, AmerisourceBergen began distributing generic pharmaceutical products that we previously self-distributed. The levels of generic pharmaceuticals distributed have increased throughout the fiscal year and AmerisourceBergen distributed substantially all of these pharmaceuticals for the Company as of August 31, 2014.
Our business may be adversely affected by any operational, financial or regulatory difficulties that AmerisourceBergen experiences. If AmerisourceBergen's operations are seriously disrupted for any reason, whether a natural disaster, labor disruption, regulatory action or otherwise, it could adversely affect our business and our sales and profitability. Our distribution agreement with AmerisourceBergen is subject to early termination in certain circumstances, and, upon the expiration or termination of the agreement, there can be no assurance that we or AmerisourceBergen will be willing to renew the agreement or enter into a new agreement, on terms favorable to us or at all. We believe that alternative sources of supply for most generic and brand-name pharmaceuticals are readily available, except to the extent that brand-name drugs are available to the market exclusively through the manufacturer. We believe we could obtain and qualify alternative sources, including through resuming self-distribution for many products, for substantially all of the prescription drugs we sell on an acceptable basis, and accordingly that the impact of any disruption would be temporary. However, there can be no assurance we would be able to engage alternative supply sources or implement self-distribution processes on a timely basis or on terms favorable to us, or effectively manage these transitions, any of which could adversely affect our business, financial condition and results of operations.
The anticipated strategic and financial benefits of our relationship with AmerisourceBergen may not be realized.
Walgreens entered into the arrangement with AmerisourceBergen and Alliance Boots with the expectation that the transactions contemplated thereby would result in various benefits including, among other things, procurement cost savings and operating efficiencies, innovation and sharing of best practices. The processes and initiatives needed to achieve these potential benefits are complex, costly and time-consuming. Many of the anticipated synergies and expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Achieving the anticipated benefits from the arrangement is subject to a number of significant challenges and uncertainties, including, whether unique corporate cultures of separate organizations will work collaboratively in an efficient and effective manner, the possibility of faulty assumptions underlying expectations regarding potential synergies, unforeseen expenses or delays, and competitive factors in the marketplace. In addition, we and Alliance Boots have the right, but not the obligation, under the transactions contemplated by the Framework Agreement dated as of March 18, 2013 by and among the Company, Alliance Boots and AmerisourceBergen (the Framework Agreement) to invest in the equity of AmerisourceBergen. There can be no assurance that we or Alliance Boots will complete any specific level of such potential equity investments in AmerisourceBergen, or that if completed, that such investments will ultimately be profitable. If such investments are completed and the price of AmerisourceBergen common stock subsequently declines substantially, we could experience a loss on or impairment of such investment, which could adversely affect our financial condition and results of operations. We could also encounter unforeseen costs, circumstances or issues existing or arising with respect to the transactions and collaboration we anticipate resulting from the Framework Agreement. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have a material adverse impact on our business, financial condition and results of operations and the price of our common stock.
Changes in economic conditions could adversely affect consumer buying practices and reduce our revenues and profitability.
Our performance has been, and may continue to be, adversely impacted by negative changes in national, regional or local economic conditions and consumer confidence. The current economic environment has had a material impact on consumer behavior that could persist even as the economy recovers. External factors that affect consumer confidence and over which we exercise no influence include unemployment rates, levels of personal disposable income, national, regional or local economic conditions and acts of war or terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns. A decrease in overall consumer spending as a result of changes in economic conditions could adversely affect our front-end and pharmacy sales and negatively impact our profitability. All these factors could impact our revenues, operating results and financial condition.
The industries in which we operate are highly competitive and further increases in competition could adversely affect us.
In our retail drugstore business, we face intense competition from local, regional and national companies, including other drugstore chains, independent drugstores, mail-order prescription providers and various other retailers such as grocery stores, convenience stores, mass merchants and dollar stores, many of which are aggressively expanding in markets we serve. In the other markets in which we compete, including health and wellness services, we also operate in a highly competitive environment. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, and this could require us to reevaluate our pricing structures to remain competitive. Our failure to reduce prices could result in decreased revenue and negatively affect our profitability.
If the merchandise and services that we offer fail to meet customer needs, our sales may be adversely affected.
Our success depends on our ability to offer a superior shopping experience, a quality assortment of available merchandise and superior customer service. We must identify, obtain supplies of, and offer to our customers, attractive, innovative and high-quality merchandise on a continuous basis. Our products and services must satisfy the needs and desires of our customers, whose preferences may change in the future. It is difficult to predict consistently and successfully the products and services our customers will demand. If we misjudge either the demand for products and services we sell or our customers' purchasing habits and tastes, we may be faced with excess inventories of some products and missed opportunities for products and services we chose not to offer. In addition, our sales may decline or we may be required to sell the merchandise we have obtained at lower prices. Failure to timely identify or effectively respond to changing consumer tastes, preferences and spending patterns could negatively affect our relationship with our customers, the demand for our products and services and our market share.
Our private brand offerings expose us to various additional risks.
In addition to brand name products, we offer our customers private brand products that are not available from other retailers. We seek to continue to grow our exclusive private brand offerings as part of our growth strategy, including through expanded offering of Boots No7 and other brands owned or licensed on an exclusive basis by Alliance Boots. Maintaining consistent product quality, competitive pricing, and availability of our private brand offerings for our customers is important in developing and maintaining customer loyalty. We have invested in our development and procurement resources and marketing efforts relating to these private brand offerings. Although we believe that our private brand products offer value to our customers at each price point and typically provide us with higher gross margins than comparable national brand products we sell, the expansion of our private brand offerings also subjects us to certain risks in addition to those discussed elsewhere in this section, such as: potential product liability risks and mandatory or voluntary product recalls; our ability to successfully protect our proprietary rights and successfully navigate and avoid claims related to the proprietary rights of third parties; our ability to successfully administer and comply with applicable contractual obligations and regulatory requirements; and other risks generally encountered by entities that source, sell and market exclusive branded offerings for retail. An increase in sales of our private brands may also adversely affect sales of our vendors' products, which, in turn, could adversely affect our relationship with certain of our vendors. Any failure to adequately address some or all of these risks could have a significant adverse effect on our business, results of operations and financial condition.
If we do not successfully develop and maintain a relevant omni-channel experience for our customers, our business and results of operations could be adversely impacted.
Omni-channel retailing is rapidly evolving and we must keep pace with changing customer expectations and new developments by our competitors. Our customers are increasingly using computers, tablets, mobile phones, and other devices to shop online. As part of our omni-channel strategy, we are making technology investments in our websites and applications for mobile phones and other electronic devices. If we are unable to make, improve, or develop relevant customer-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. In addition, if our online businesses or our other customer-facing technology systems do not function as designed, we may experience a loss of customer confidence, data security breaches, lost sales, or be exposed to fraudulent purchases, any of which could adversely affect our business, reputation and results of operations.
Our strategy is dependent, in part, upon the successful implementation of various strategic initiatives.
While our overall business strategy consists of many components and underlying initiatives, our long-term financial performance will be impacted by our ability to execute certain key initiatives. In fiscal 2015, we plan to pursue strategies designed to create a "Well Experience" and further transform our traditional drugstore to a "retail health and daily living" store while delivering an outstanding customer experience through enhanced employee engagement; transform the role of community pharmacy to play a greater role in healthcare through integration and expanded services; and establish an efficient global platform enabling us to expand across new channels and markets. If we are unable to effectively execute one or more of these key initiatives, our business, financial condition and results of operations may be materially adversely affected.
Our ability to grow our business may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of our current leases.
Our ability to grow our business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations applicable to the types of stores we desire to construct may impact our ability to find suitable locations and influence the cost of constructing our stores. The expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores.
A significant disruption in our computer systems could adversely affect our operations.
We rely extensively on our computer systems to manage our ordering, pricing, point-of-sale, pharmacy fulfillment, inventory replenishment, customer loyalty program, finance and other processes. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, natural disasters, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss or corruption of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. In addition, we are currently making, and expect to continue to make, substantial investments in our information technology systems and infrastructure, some of which are significant. Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-effectively acquiring new systems with new functionality. Implementing new systems carries significant potential risks, including failure to operate as designed, potential loss or corruption of data or information, cost overruns, implementation delays, disruption of operations, and the potential inability to meet business and reporting requirements. While we are aware of inherent risks associated with replacing these systems and believe we are taking reasonable action to mitigate known risks, there can be no assurance that these technology initiatives will be deployed as planned or that they will be timely implemented without disruption to our operations.
If we do not maintain the privacy and security of sensitive customer and business information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
The protection of customer, employee, and company data is critical to our business. A significant breach of customer, employee, or company data could attract a substantial amount of media attention, damage our customer relationships and reputation and result in lost sales, fines or lawsuits. Throughout our operations, we receive, retain and transmit certain personal information that our customers provide to purchase products or services, enroll in promotional programs, participate in our customer loyalty program, register on our websites, or otherwise communicate and interact with us. In addition, aspects of our operations depend upon the secure transmission of confidential information over public networks. Although we deploy a layered approach to address information security threats and vulnerabilities designed to protect confidential information against data security breaches, a compromise of our data security systems or of those of businesses with whom we interact, which results in confidential information being accessed, obtained, damaged or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers, financial institutions, payment card associations and other persons, any of which could materially and adversely affect our business, financial position and results of operations. In addition, a security breach could require that we expend substantial additional resources related to the security of information systems and disrupt our business.
The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements across business units. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes. If we or those with whom we share information fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged and we could be subject to additional litigation and regulatory risks. Our security measures may be undermined due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business.
Our growth strategy is partially dependent upon acquisitions, joint ventures and other strategic investments, some of which may not prove to be successful.
We have grown our business, in part, through acquisitions in recent years and expect to continue to acquire or invest in drugstore chains, independent drugstores, health and well-being businesses and other businesses in the future. Acquisitions involve numerous risks, including difficulties in integrating the operations and personnel of the acquired companies, distraction of management from overseeing our existing operations, difficulties in entering markets or lines of business in which we have no or limited direct prior experience, the possible loss of key employees and customers and difficulties in achieving the synergies we anticipated. These transactions may also cause us to significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition or investment, issue common stock that would dilute our current shareholders' percentage ownership, or incur asset write-offs and restructuring costs and other related expenses. Acquisitions, joint ventures and strategic investments involve numerous other risks, including potential exposure to unknown liabilities of acquired or investee companies. In connection with acquisitions, joint ventures or strategic investments outside the United States, we may from time to time, in some instances enter into foreign currency contracts or other derivative instruments to hedge some or all of the foreign currency fluctuation risks, which subjects us to the risks associated with such derivative contracts and instruments. No assurance can be given that our acquisitions, joint ventures and other strategic investments will be successful and will not materially adversely affect our business, financial condition or results of operations.
Changes in the health care regulatory environment may adversely affect our business.
Political, economic and regulatory influences are subjecting the healthcare industry to significant changes that could adversely affect our results of operations.
In recent years, the healthcare industry has undergone significant changes in an effort to reduce costs and government spending. These changes include an increased reliance on managed care; cuts in certain Medicare and Medicaid funding; consolidation of competitors, suppliers and other market participants; and the development of large, sophisticated purchasing groups. We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental funding at the state or federal level for certain healthcare services or adverse changes in legislation or regulations governing prescription drug pricing, healthcare services or mandated benefits, may cause customers to reduce the amount of our products and services they purchase or the price they are willing to pay for our products and services. We expect continued government and private payer pressure to reduce pharmaceutical pricing. Changes in pharmaceutical manufacturers' pricing or distribution policies could also significantly reduce our profitability.
The ACA, enacted in 2010, is intended to expand health insurance coverage to more than 30 million uninsured Americans through a combination of insurance market reforms, an expansion of Medicaid, subsidies and health insurance mandates. When fully implemented, these provisions are expected to increase the number of people in the United States who have insurance coverage for at least a portion of prescription drug costs. While certain provisions of the ACA took effect immediately, others have delayed effective dates or require further rulemaking action by governmental agencies to implement, which is not yet complete. Future rulemaking under the ACA or otherwise could increase regulation of pharmacy services, result in changes to pharmacy reimbursement rates, and otherwise change the way we do business. We cannot predict the timing or impact of any future rulemaking, but any such rulemaking could have an adverse impact on our results of operations.
We are subject to governmental regulations and procedures and other legal requirements. A significant change in, or noncompliance with, these regulations, procedures and requirements could have a material adverse effect on our profitability.
Our retail drugstore and health and wellness services businesses are subject to numerous federal, state and local regulations. Changes in these regulations may require extensive system and operating changes that may be difficult to implement. Untimely compliance or noncompliance with applicable regulations could result in the imposition of civil and criminal penalties that could adversely affect the continued operation of our business, including: suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; loss of licenses; and significant fines or monetary penalties.
The regulations to which we are subject include, but are not limited to: federal, state and local registration and regulation of pharmacies; dispensing and sale of controlled substances and products containing pseudoephedrine; applicable Medicare and Medicaid regulations; the Health Insurance Portability and Accountability Act (HIPAA); the ACA; laws and regulations relating to the protection of the environment and health and safety matters, including those governing exposure to, and the management and disposal of, hazardous substances; regulations of the U.S. Food and Drug Administration (FDA), the U.S. Federal Trade Commission, the Drug Enforcement Administration (DEA), and the Consumer Product Safety Commission, as well as state regulatory authorities, governing the availability, sale, advertisement and promotion of products we sell; anti-kickback laws; data privacy and security laws; false claims laws; laws against the corporate practice of medicine; and federal and state laws governing the practice of the profession of pharmacy. For example, the DEA, FDA and various state regulatory authorities regulate the distribution of pharmaceuticals and controlled substances. We are required to hold valid DEA and state-level licenses, meet various security and operating standards and comply with the Controlled Substance Act and its accompanying regulations governing the sale, marketing, packaging, holding and distribution of controlled substances. The DEA, FDA and state regulatory authorities have broad enforcement powers, including the ability to suspend our distribution centers' licenses to distribute pharmaceutical products (including controlled substances), seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. For example, in June 2013, the Company entered into a settlement agreement with the DEA and the United States Department of Justice relating to controlled substance matters that required the Company to pay $80 million and implement certain remedial actions. We are also governed by federal and state laws of general applicability, including laws regulating matters of working conditions, health and safety and equal employment opportunity. In addition, we could have exposure if we are found to have infringed another party's intellectual property rights.
Should a product liability issue, recall or personal injury issue arise it may damage our reputation, which may result in a material adverse effect on our business and financial condition and adversely affect our ability to maintain adequate product or other liability insurance coverage. If we fail or are unable to maintain adequate product or other liability insurance coverage for any reason, it may also result in a material adverse effect on our business and financial condition.
Products that we sell could become subject to contamination, product tampering, mislabeling, recall or other damage. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability or personal injury claims may be asserted against us with respect to any of the products or pharmaceuticals we sell or services we provide. Our health and wellness business also involves exposure to professional liability claims related to medical care. Should a product or other liability issue arise, the coverage limits under our insurance programs and the indemnification amounts available to us may not be adequate to protect us against claims. We also may not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a product liability or personal injury issue or judgment against us or a product recall could have a significant adverse effect on our business, financial condition and results of operations.
We have significant outstanding debt; our debt will increase if we incur additional debt in the future and do not retire existing debt.
We have outstanding debt and other financial obligations and significant unused borrowing capacity. As of August 31, 2014, we had approximately $4.5 billion of outstanding indebtedness, including short-term borrowings. Our debt level and related debt service obligations could have negative consequences, including:
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requiring us to dedicate significant cash flow from operations to the payment of principal, interest and other amounts payable on our debt, which would reduce the funds we have available for other purposes, such as working capital, capital expenditures, acquisitions, share repurchases and dividends;
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making it more difficult or expensive for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements, debt refinancing, acquisitions or other purposes;
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reducing our flexibility in planning for or reacting to changes in our industry and market conditions;
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making us more vulnerable in the event of a downturn in our business; and
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exposing us to interest rate risk given that a portion of our debt obligations is at variable interest rates.
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We may incur or assume significantly more debt in the future. See "Risk Factors - Additional Risks Related to our Alliance Boots Investment and the Second Step Transaction - We expect to incur significant additional debt in connection with second step transaction" below. If we add new debt and do not retire existing debt, the risks described above could increase.
Our long-term debt obligations include covenants that may adversely affect our ability to incur certain secured indebtedness or engage in certain types of sale and leaseback transactions. In addition, our existing credit agreements require the Company to maintain as of the last day of each fiscal quarter a ratio of consolidated debt to total capitalization not to exceed a certain level. Our ability to comply with these restrictions and covenants may be affected by events beyond our control. If we breach any of these restrictions or covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.
Our credit ratings are important to our business.
The major credit rating agencies have assigned us and our corporate debt investment grade credit ratings. These ratings are based on a number of factors, which include their assessment of our financial strength and financial policies. We aim to maintain investment grade ratings as they serve to lower our borrowing costs and facilitate our access to a variety of lenders and other creditors, including landlords for our leased stores, on terms that we consider advantageous to our business. However, there can be no assurance that any particular rating assigned to us will remain in effect for any given period of time or that a rating will not be changed or withdrawn by a rating agency, if in that rating agency's judgment, future circumstances relating to the basis of the rating so warrant. Incurrence of additional debt by Alliance Boots or us could adversely affect our credit ratings. Any downgrade of our credit ratings could adversely affect our cost of funds, liquidity, competitive position and access to capital markets.
Our quarterly results and Alliance Boots operating results may fluctuate significantly.
Our operating results have historically varied on a quarterly basis and may continue to fluctuate significantly in the future. Factors that may affect our quarterly operating results include, but are not limited to, seasonality, the timing of the introduction of new generic and brand name prescription drugs, inflation including with respect to generic drug procurement costs, the timing and severity of the cough, cold and flu season, changes in payer reimbursement rates and terms, significant acquisitions, dispositions, joint ventures and other strategic initiatives, asset impairments, the relative magnitude of our LIFO provision in any particular quarter, variations in the earnings contribution from equity method investments such as Alliance Boots, fluctuations in the value of our warrants to acquire AmerisourceBergen common stock, prolonged severe weather in key markets, and the other risk factors discussed under this Item 1A. Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and investors should not rely on the results of any particular quarter as an indication of our future performance.
In addition, Alliance Boots operating results have historically varied on a quarterly basis and may continue to fluctuate significantly in the future. Alliance Boots faces risks similar to those we face and additional risks particular to its businesses, operations and markets, including: macro-economic and political risks; regulatory risks including, with respect to its Health & Beauty Division, the potential adverse effects of changes to licensing regimes for pharmacies, prescription processing regimes or reimbursement arrangements and, with respect to its Pharmaceutical Wholesale Division, the potential adverse effects of regulations relating to such things as product margins, product traceability and the conditions under which products must be stored; changes and trends in consumer behavior and spending; competitive risks resulting from intense competition from a wide variety of competitors including, with respect to its Health & Beauty Division, other pharmacies, supermarkets and department stores and, with respect to its Pharmaceutical Wholesale Division, from direct competitors and alternative supply sources such as importers and manufacturers who supply directly to pharmacies; health, safety and environmental risks; product/services risks, including risks associated with defective products, the provision of inadequate services, the potential infiltration of counterfeit products into the supply chain, errors in re-labeling of products and contamination or product mishandling issues; risk of major operational business failures such as a major failure of its distribution centers and logistics infrastructure, information technology systems or the operational systems of key third party suppliers; and risks relating to increased costs, not achieving, or delays in achieving, expected synergies, changes in management, acquisitions, currency exchange, funding and interest rates, pension contributions including the potential need to increase the funding of its defined benefit pension plans due to lower than expected pension fund investment returns and/or increased life expectancy of plan members, and protection of confidential personal and business data.
The equity income we report from Alliance Boots is subject to conversion from IFRS to U.S. GAAP and currency translation and is reported on a three-month lag basis, which impacts the quarterly and fiscal year timing of when Alliance Boots results and synergies are reflected in our financial statements.
Net income reported by Alliance Boots must be converted from the applicable IFRS standards to generally accepted accounting principles in the United States (U.S. GAAP) and translated from British pounds Sterling at the average rate for the period, which subjects us to exchange rate fluctuations and other currency risks. We account for our 45% interest in Alliance Boots using the equity method of accounting on a three-month lag basis, which impacts the quarterly and fiscal year timing of when Alliance Boots results and synergies are reflected in the equity income from Alliance Boots included in our financial statements. Alliance Boots quarterly results are not reflected in the equity income reported in our consolidated financial statements until our quarterly period ending three months after the end of the related Alliance Boots three-month period.
Our business is seasonal in nature, and adverse events during the holiday and cough, cold and flu seasons could impact our operating results negatively.
Our business is seasonal in nature, with the second fiscal quarter (December, January and February) typically generating a higher proportion of front-end sales and earnings than other fiscal quarters. We purchase significant amounts of seasonal inventory in anticipation of the holiday season. Adverse events, such as deteriorating economic conditions, higher unemployment, higher gas prices, public transportation disruptions, or unanticipated adverse weather could result in lower-than-planned sales during key selling seasons. For example, frequent or unusually heavy snowfall, ice storms, rainstorms, windstorms or other extreme weather conditions over a prolonged period could make it difficult for our customers to travel to our stores and increase our snow removal and other costs. This could lead to lower sales or to unanticipated markdowns, negatively impacting our financial condition and results of operations. In addition, both prescription and non-prescription drug sales are affected by the timing and severity of the cough, cold and flu season which can vary considerably from year to year. In addition, the Alliance Boots business is seasonal in nature, typically generating a higher proportion of revenue and earnings in the winter holiday and cold and flu season. Because of the three-month lag in reporting equity income from our investment in Alliance Boots, the results of Alliance Boots for December, January and February are reflected in the equity income included in our financial statements for our third fiscal quarter ending May 31.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, sales returns reserves, asset impairment, impairment of goodwill and other intangible assets, inventories, vendor rebates and other vendor consideration, lease obligations, self-insurance liabilities, tax matters, unclaimed property laws and litigation and other contingent liabilities are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance or financial condition. For example, changes in accounting standards and the application of existing accounting standards particularly related to the measurement of fair value as compared to carrying value for the Company's reporting units, including goodwill, intangible assets and investments in equity interests, including investments held by our equity method investees, may have an adverse effect on the Company's financial condition and results of operations. Factors that could lead to impairment of goodwill and intangible assets include significant adverse changes in the business climate and declines in the financial condition of a reporting unit. Factors that could lead to impairment of investments in equity interests of the companies in which we invested or the investments held by those companies include a prolonged period of decline in their operating performance or adverse changes in the economic, regulatory and legal environments of the countries they operate in. New accounting guidance also may require systems and other changes that could increase our operating costs and/or change our financial statements. For example, implementing future accounting guidance related to leases, revenue and other areas impacted by the current convergence project between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) could require us to make significant changes to our lease management system or other accounting systems, and could result in changes to our financial statements.
We are involved in a number of legal proceedings and audits and, while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes could adversely affect our business, financial condition and results of operations.
We are involved in legal proceedings and subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the course of our business (see the discussion of Legal Proceedings in Note 12 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K). Legal proceedings, in general, and securities and class action litigation, in particular, can be expensive and disruptive. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. From time to time, the Company is also involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property and other matters. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, and the costs incurred in litigation can be substantial, regardless of the outcome. Substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, we could from time to time incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid. The outcome of some of these legal proceedings and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources.
We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions.
We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. As the tax rates vary among jurisdictions, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. From time to time, legislative initiatives are proposed that could adversely affect our tax positions, effective tax rate, tax payments or financial condition. In addition, tax laws are complex and subject to varying interpretations. Any change in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations.
Our insurance program may expose us to unexpected costs and negatively affect our financial performance.
We use a combination of insurance and self-insurance to provide for potential liability for workers' compensation, automobile and general liability, property, director and officers' liability, and employee health care benefits. Provisions for losses related to self-insured risks generally are based upon actuarially determined estimates. Any actuarial projection of losses is subject to a high degree of variability. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all adversely affect our financial condition, results of operations and cash flows.
There are a number of additional business risks that could adversely affect our financial results.
Many other factors could adversely affect our financial results, including:
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If we are unsuccessful in establishing effective advertising, marketing and promotional programs, our sales or sales margins could be negatively affected.
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Our success depends on our continued ability to attract and retain store and management and professional personnel, and the loss of key personnel could have an adverse effect on the results of our operations, financial condition or cash flow.
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Natural disasters, severe weather conditions, terrorist activities, global political and economic developments, war, health epidemics or pandemics or the prospect of these events can impact our store operations or damage our facilities in affected areas or have an adverse impact on consumer confidence levels and spending in our stores.
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The long-term effects of climate change on general economic conditions and the pharmacy industry in particular are unclear, and changes in the supply, demand or available sources of energy and the regulatory and other costs associated with energy production and delivery may affect the availability or cost of goods and services, including natural resources, necessary to run our business.
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The products we sell are sourced from a wide variety of domestic and international vendors, and any future inability to find qualified vendors and access products in a timely and efficient manner could adversely impact our business.
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Additional Risks Related to our Alliance Boots Investment and the Second Step Transaction
The following risks relate to our existing investment in Alliance Boots and/or the pending second step transaction, regardless of whether or not the Reorganization is completed.
The anticipated strategic and financial benefits of our transaction with Alliance Boots may not be realized.
Walgreens and Alliance Boots entered into the Purchase and Option Agreement, and Walgreens exercised the call option pursuant to the Purchase and Option Agreement, with the expectation that the transactions contemplated thereby would result in various benefits, including, among other things, procurement cost savings and operating efficiencies, revenue synergies, innovation, sharing of best practices and a strengthened market position that may serve as a platform for future growth. The processes and initiatives needed to achieve these potential benefits are complex, costly and time consuming, and we have not previously completed a transaction comparable in size or scope. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Achieving the expected benefits of the Alliance Boots transaction, including the second step transaction, is subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of geographically separate organizations, the possibility of faulty assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses or delays, and competitive factors in the marketplace. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues existing or arising with respect to the business of Alliance Boots or otherwise resulting from the transaction. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have a material adverse impact on our business, financial condition and results of operations and the price of our common stock.
Our August 2012 investment in Alliance Boots significantly increased, and the proposed second step transaction would significantly further increase, our exposure to the risks of operating internationally.
Prior to the first step transaction, substantially all of our operations were conducted within the United States and its territories. The first step transaction significantly increased the importance of international business to our future operations, growth and prospects. The completion of the second step transaction will be a material further step in this direction. A substantial portion of Alliance Boots revenues are generated in the European Union and neighboring countries and substantially all of Alliance Boots revenues are generated outside the United States. Our investment in international business operations is subject to a number of risks, including:
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compliance with a wide variety of foreign laws and regulations, including retail and wholesale pharmacy, licensing, tax, foreign trade, intellectual property, privacy and data protection, currency, political and other business restrictions and requirements and local laws and regulations, whose interpretation and enforcement vary significantly among jurisdictions and can change significantly over time;
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additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption laws;
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potential difficulties in managing foreign operations, enforcing agreements and collecting receivables through foreign legal systems;
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price controls imposed by foreign countries;
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tariffs, duties or other restrictions on foreign currencies or trade barriers imposed by foreign countries;
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potential adverse tax consequences, including tax withholding laws and policies and restrictions on repatriation of funds to the United States;
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fluctuations in currency exchange rates, including uncertainty regarding the Euro;
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impact of recessions and economic slowdowns in economies outside the United States, including foreign currency devaluation, higher interest rates, inflation, and increased government regulation or ownership of traditional private businesses;
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the instability of foreign economies, governments and currencies and unexpected regulatory, economic or political changes in foreign markets; and
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developing and emerging markets may be especially vulnerable to periods of instability and unexpected changes, and consumers in those markets may have relatively limited resources to spend on products and services.
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We cannot assure you that one or more of these factors will not have a material adverse effect on our business, results of operation or financial condition.
Our Company will be more exposed to currency exchange rate fluctuations as, following completion of the second step transaction, there will be an increased proportion of assets, liabilities and earnings denominated in foreign currencies.
Prior to the first step transaction, substantially all of our operations were conducted within the United States and its territories. The first step transaction significantly increased the potential impact of currency exchange rate fluctuations on our business. If the second step transaction is completed, the financial results of the combined company will be more exposed to currency exchange rate fluctuations and an increased proportion of assets, liabilities and earnings will be denominated in non-U.S. dollar currencies.
We will continue to present our financial statements in U.S. dollars and will have a significant proportion of net assets and income in non-U.S. dollar currencies, primarily pounds sterling and the euro, as well as a range of emerging market currencies. Our financial results and capital ratios will therefore be sensitive to movements in foreign exchange rates. A depreciation of non-U.S. dollar currencies relative to the U.S. dollar could have an adverse impact on our financial results.
The second step transaction is subject to conditions, including certain conditions that may not be satisfied, and may not be completed on a timely basis, or at all. Failure to complete the second step transaction could have material and adverse effects on the Company.
The completion of the second step transaction is subject to a number of conditions, including approval by the shareholders of Walgreens of the issuance of shares to the Sellers as consideration for the second step transaction, which makes the completion and timing of the completion of the second step transaction uncertain.
If the second step transaction is not completed on a timely basis, or at all, our ongoing businesses may be adversely affected and, without realizing any of the benefits of having completed the second step transaction, we will be subject to a number of risks, including the following:
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Subject to limited exceptions, if the closing of the second step transaction does not occur:
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the Company will be required to return to the Sellers 1/15th of the Alliance Boots shares acquired by the Company in the first step transaction, which equals 3% of the issued and outstanding share capital of Alliance Boots, in exchange for nominal consideration of one British pound sterling;
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the Company will continue to own a significant minority interest in Alliance Boots, but certain of the Company's governance rights as a shareholder of Alliance Boots will be modified;
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in general, the Company will not be permitted to sell or otherwise transfer any of its Alliance Boots shares for a period of 24 months;
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in the event that one of the Sellers, AB Acquisitions Holdings Limited (AB Acquisitions), decides to sell or otherwise transfer its Alliance Boots shares to a third party, AB Acquisitions will have the right to require the Company to transfer all its Alliance Boots shares in the same transaction on the same terms; and in the event that AB Acquisitions decides to sell some or all of its Alliance Boots shares in an initial public offering, AB Acquisitions will have the right to require the Company to participate proportionally by selling some or all of its Alliance Boots shares;
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Alliance Boots will have the right to either (a) acquire 50% of the AmerisourceBergen shares then jointly owned by the Company and Alliance Boots through a joint venture entity, in exchange for 50% of the funding previously provided by the Company to the joint venture entity to acquire AmerisourceBergen shares (plus interest) (a 50/50 dissolution) or (b) settle with the Company in cash to replicate the same economic impact as a 50/50 dissolution, but with the Company retaining 100% of the AmerisourceBergen shares; and
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if the Company subsequently becomes entitled to designate a second director nominee on the AmerisourceBergen board of directors pursuant to the AmerisourceBergen shareholders agreement to which both the Company and Alliance Boots are parties, the second director nominee would be an Alliance Boots executive, designated by the Company in consultation with and at the direction of Alliance Boots.
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The Company and Alliance Boots currently engage in various commercial transactions and arrangements in connection with initiatives intended to help realize potential synergies across both companies, including through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture. If the second step transaction does not occur, the status and prospects of, and future willingness of either the Company and/or Alliance Boots to continue to engage in, these transactions and arrangements, including Walgreens Boots Alliance Development GmbH, would be uncertain.
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The market price of Walgreens common stock could decline to the extent that the current market price reflects a market assumption that the second step transaction will be completed.
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Uncertainty regarding the completion of the second step transaction may foster uncertainty among employees about their future roles, which could adversely affect the ability of the Company to attract and retain key personnel.
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The Company may be unable to capture the anticipated synergies associated with the second step transaction and the Reorganization, including expected increases in earnings and cost savings.
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The Company may waive one or more of the conditions to the second step transaction.
Each of the conditions to the Company's obligations to complete the second step transaction may be waived, in whole or in part, by the Company, to the extent permitted by applicable law. Our Board of Directors will evaluate the materiality of any waiver to determine whether amendment of the proxy statement/prospectus filed in connection with the Transactions and resolicitation of proxies is necessary. If our Board of Directors determines that a waiver is not significant enough to require resolicitation of its shareholders' proxies, it will have the discretion to complete the second step transaction without seeking further shareholder approval. Because certain conditions will not be satisfied prior to the date of the Walgreen's Special Meeting of Shareholders at which the shareholders will vote to approve the Transactions (the Special Meeting), there is a risk that our Board of Directors may waive a condition without shareholder approval.
Certain of the Company's directors and executive officers may have interests in the Transactions that are different from, or in addition to, the interests of the Company's shareholders generally.
Certain of the Company's directors and executive officers may have material financial interests in the Transactions that are different from, or in addition to, the interests of the Company's shareholders generally.
Moreover, by virtue of their share ownership in the Company (which share ownership will increase upon the completion of the second step transaction), the Sellers, which include KKR & Co. L.P. (KKR) and certain of its affiliates (the KKR Investors) and Stefano Pessina and certain of his affiliates (the SP Investors), may have the power to influence our affairs and the outcome of matters required to be submitted to shareholders for approval. The SP Investors and/or the KKR Investors may have interests that differ from those of holders of our common stock generally, which could give rise to conflicts of interest, including:
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conflicts between the SP Investors and/or the KKR Investors and other shareholders, whose interests may differ with respect to our strategic direction or significant corporate transactions; and
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conflicts related to corporate opportunities that could be pursued by us, on the one hand, or by the SP Investors and/or the KKR Investors, on the other hand, notwithstanding that the SP Investors are subject to certain non-compete restrictions under the shareholders agreement we entered into with the SP Investors and the KKR Investors on August 2, 2012 (as amended, the Company Shareholders Agreement).
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Whether or not the second step transaction is completed, the announcement and prospect of the successful completion of the second step transaction could cause disruptions in the businesses of the Company and/or Alliance Boots, which could have material adverse effects on our business and financial results.
Whether or not the second step transaction is completed, the announcement and prospect of the successful completion of the second step transaction could cause disruptions in the businesses of the Company and/or Alliance Boots. For example, some current and prospective employees may experience uncertainty about their future roles within the combined company, which may adversely affect the Company's and Alliance Boots' abilities to retain or recruit key managers and other employees. If the Company and Alliance Boots fail to manage these risks effectively, our business and financial results could be materially adversely affected.
If there are significant, unforeseen difficulties in integrating the business operations of Alliance Boots, they could adversely affect our business, financial condition and results of operations, and the price of our common stock.
If the second step transaction is completed, we intend, to the extent possible, to further integrate the operations of Alliance Boots. Our goal in integrating these operations is to increase revenues through enhanced growth opportunities and achieve cost savings by taking advantage of the anticipated synergies of consolidation.
However, we may encounter difficulties further integrating Alliance Boots' operations with ours, resulting in a delay or the failure to achieve the anticipated synergies, including expected increases in earnings and cost savings. If such difficulties are significant, they could have a material adverse impact on our business, financial condition and results of operations and the price of our common stock.
We may incur higher than expected integration, transaction and acquisition-related costs.
We expect to incur a significant amount of non-recurring costs associated with the Transactions, including legal, accounting, financial and tax advisory and other transaction fees and costs. Some of these costs are payable regardless of whether the second step transaction and/or the Reorganization are completed and such costs may be material and/or higher than expected.
The second step transaction will increase our exposure to certain joint ventures and investments of Alliance Boots over which we would not have sole control. Some of these companies may operate in sectors that differ from our or Alliance Boots' current operations and have different risks.
The completion of the second step transaction will increase our and our shareholders' effective interest in certain joint ventures and other investments of Alliance Boots over which Alliance Boots does not exercise control. Investments in these businesses, among other risks, subject us to the operating and financial risks of these businesses and to the risk that we do not have sole control over the operations of these businesses. Investments in entities over which we (including through Alliance Boots) do not have sole control, including joint ventures and strategic alliances, present additional risks such as having differing objectives from our partners or the entities in which we or Alliance Boots are invested, or becoming involved in disputes, or competing with those persons. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us. In addition, Alliance Boots owns a 49% interest in Alliance Healthcare Italia S.p.a., a pharmaceutical wholesaling, distribution and retail pharmacy business operating primarily in Italy, over which AB Acquisitions is, and, following the completion of the second step transaction, will remain, the controlling 51% shareholder.
The second step transaction, if consummated, would reduce the percentage ownership interests of our current shareholders and the principal shareholders of AB Acquisitions may have significant voting influence over matters requiring shareholder approval.
Upon completion of the second step transaction, existing Walgreens shareholders will own a smaller percentage of Walgreens Boots Alliance (or Walgreens) common stock than they currently own. In addition, while, as of the date of this report, we have no present intention or plans to do so, it is also possible that we will decide to issue common stock, or securities convertible into common stock, in a public or private offering to finance the second step transaction.
In connection with the closing of the first step transaction on August 2, 2012, we issued approximately 83.4 million shares of our common stock to Alliance Boots shareholders and entered into the Company Shareholders Agreement. These shares represented approximately 8.8% of our outstanding shares as of August 31, 2014 (approximately 7.6% of the pro forma total outstanding shares of Walgreens Boots Alliance, assuming completion of the Transactions as of that date and giving effect to the share issuance in the second step transaction), the substantial majority of which are held by the SP Investors (approximately 7.7% of our outstanding shares as of August 31, 2014 or approximately 6.7% of the pro forma total outstanding shares of Walgreens Boots Alliance, assuming completion of the Transactions as of that date and giving effect to the share issuance in the second step transaction). If the second step transaction is completed, we will acquire the remaining 55% interest in Alliance Boots for £3.133 billion (equivalent to approximately $5.2 billion based on exchange rates as of August 31, 2014) in cash, payable in British pounds sterling, and 144.3 million shares of Walgreens common stock, subject to certain potential adjustments, representing approximately 13.2% of the estimated pro forma total outstanding shares of Walgreens Boots Alliance as of August 31, 2014, assuming completion of the Transactions as of that date and giving effect to the share issuance in the second step transaction. It is expected that, following the closing of the second step transaction, AB Acquisitions would distribute the cash and shares received by it in connection with the transaction to the SP Investors, the KKR Investors and the other investors in AB Acquisitions (Other Investors), subject to the timing considerations noted below. Accordingly, while the final allocation between cash and shares to be received by each of the SP Investors, the KKR Investors and the Other Investors has not yet been determined, the beneficial ownership of each of the SP Investors, KKR Investors and the Other Investors is expected to significantly increase following completion of the second step transaction. AB Acquisitions may not distribute any of the shares of Walgreens Boots Alliance (or Walgreens, as applicable) common stock it will receive on completion of the second step transaction to its investors until the date that is nine months after the completion of the second step transaction and, unless the SP Investors and the KKR Investors have elected to put certain guarantees in place, may not distribute more than 10% of such shares until the date that is twelve months after the completion of the second step transaction.
For so long as the SP Investors and the KKR Investors continue to meet certain beneficial ownership thresholds and subject to certain other conditions, the SP Investors and the KKR Investors, respectively, will each be entitled to designate one nominee to our Board of Directors for inclusion in the Company's slate of directors (the SP Investor Designee and the KKR Investor Designee, respectively). Mr. Pessina currently serves as the SP Investor Designee and Mr. Dominic Murphy currently serves as the KKR Investor Designee. Under the Company Shareholders Agreement, the SP Investors and the KKR Investors have agreed to, for so long as the SP Investors have the right to designate the SP Investor Designee (or Mr. Pessina continues to serve as Executive Chairperson or Chief Executive Officer of Alliance Boots) and for so long as the KKR Investors have the right to designate the KKR Investor Designee, respectively, vote all of their shares of common stock in accordance with our Board of Directors' recommendation on matters submitted to a vote of the Company's shareholders (including with respect to the election of directors). Whether or not subject to these voting provisions, the SP Investors' and/or the KKR Investors' significant interest in our common stock could be determinative in matters submitted to a vote by our shareholders.
The influence of the SP Investors and/or the KKR Investors could result in Walgreens Boots Alliance (or Walgreens, as applicable) taking actions that some other shareholders do not support or failing to take actions that some other shareholders support.
Shares issued to significant Alliance Boots shareholders will become available for future sale after the lapse of contractual transfer restrictions.
We issued approximately 83.4 million shares of our common stock to Alliance Boots shareholders in connection with the first step transaction and, if the second step transaction is completed, we will issue an additional 144.3 million shares of common stock, subject to certain potential adjustments, as partial consideration in that transaction. It is expected that, following the closing of the second step transaction, AB Acquisitions would distribute the cash and shares received by it in connection with the transaction to the SP Investors, the KKR Investors and the Other Investors, subject to the timing considerations described in the preceding risk factor. Pursuant to the Company Shareholders Agreement, certain significant Alliance Boots shareholders, including the SP Investors and the KKR Investors, are subject to various contractual restrictions that generally prohibit them from transferring their shares for specified time periods. With respect to the shares issued in the first step transaction in August 2012, and subject to certain permitted exceptions, (i) the SP Investors cannot transfer their shares until the first to occur of the closing of the second step transaction or Mr. Pessina's earlier death or permanent disability, and (ii) the KKR Investors cannot transfer their shares until the closing of the second step transaction. If the second step transaction is completed, with respect to the Walgreens Boots Alliance (or Walgreens, as applicable) shares issued in the second step transaction, all Alliance Boots holders receiving such shares (including the SP Investors and the KKR Investors) will be subject to certain restrictions on transfer under the Company Shareholders Agreement until the date nine months after the closing of the second step transaction. We also granted, pursuant to the Company Shareholders Agreement, certain Alliance Boots shareholders, including the SP Investors and the KKR Investors, the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act of 1933, as amended (the Securities Act), covering resales of our common stock held by them or to "piggyback" on a registration statement in certain circumstances. These shares also may be sold pursuant to Rule 144 under the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. The sale, or possibility of the sale, of a substantial number of shares of our common stock into the market could cause the market price of our common stock to decline.
The amount and mix of consideration required to be paid by us to the Sellers in connection with the second step transaction is subject to adjustment in certain circumstances.
If the second step transaction is completed, we will acquire the remaining 55% interest in Alliance Boots for £3.133 billion (equivalent to approximately $5.2 billion based on exchange rates as of August 31, 2014) in cash, payable in British pounds sterling, and 144.3 million shares of Walgreens common stock, subject to the volume weighted average price of Walgreens common stock not being below $31.18 per share during a period shortly before the closing of the second step transaction. However, if the volume weighted average price per share is below that level, the difference in value would be made up by a cash payment or the issuance of additional shares of common stock at the Company's election. In addition, in certain circumstances following a change of control of the Company (as defined in the Purchase and Option Agreement) prior to the closing of the second step transaction, AB Acquisitions has the right to cause us to pay 100% of the second step transaction consideration in cash. These provisions could potentially make the second step transaction significantly more costly or inadvisable by increasing the amount of cash and/or stock consideration we are required to pay. If the amount of cash we pay increases, the amount of indebtedness we incur also may increase, and if the amount of stock we are required to deliver increases, the percentage ownership interests of our existing shareholders would further decrease.
We expect to incur significant additional debt in connection with the second step transaction.
As of March 31, 2014, Alliance Boots had approximately £5.7 billion (equivalent to approximately $9.5 billion based on exchange rates as of March 31, 2014) of outstanding indebtedness, including short-term borrowings. In connection with the consummation of the second step transaction, we are likely to incur significant additional debt in connection with the financing thereof and the assumption and/or refinancing of all or substantially all of the Alliance Boots debt then outstanding. As described above under the heading "We have significant outstanding debt; our debt will increase if we incur additional debt in the future and do not retire existing debt," we have outstanding debt and other financial obligations and significant unused borrowing capacity that subjects us to certain risks and the incurrence of additional debt in connection with the consummation of the second step transaction would cause these risks to increase. We currently expect to finance the cash consideration and/or the refinancing of all or substantially all of the indebtedness of Alliance Boots and its subsidiaries in connection with the second step transaction with a combination of the issuance of new debt and available cash. Our obligation to complete the second step transaction is not subject to the receipt of financing. If we are unable to find financing sources on acceptable terms, or at all, we may experience a material adverse effect on our business, results of operation and financial condition.
The amount of goodwill and other intangible assets we have recorded as a result of acquisitions is expected to substantially increase upon completion of the Transactions. In the future, our goodwill or other intangible assets may become impaired, which could result in material non-cash charges to our results of operations.
As of August 31, 2014, we had $3.5 billion of goodwill and other intangible assets. The underlying net assets of the Company's equity method investment in Alliance Boots include goodwill and indefinite-lived intangible assets. The Company utilizes a three-month lag in reporting its share of equity income in Alliance Boots. As of March 31, 2014, its most recent fiscal year end, Alliance Boots had £9.9 billion (equivalent to approximately $16.5 billion based on exchange rates as of March 31, 2014) of goodwill and other intangible assets on its Group statement of financial position (
prepared in accordance with IFRS),
which represented approximately 57% of its total assets. Walgreens Boots Alliance will account for the Transactions, if completed, using the purchase method of accounting in accordance with U.S. GAAP, with the purchase price paid allocated to recognize the acquired assets and liabilities at their fair value and Walgreens being treated as the accounting acquiror. While the fair values and associated purchase price allocation will be determined following completion of the Transactions, we anticipate that our goodwill and other intangible assets will increase substantially following completion of the Transactions.
At least annually, or whenever events or changes in circumstances indicate a potential impairment in the carrying value as defined by generally accepted accounting principles in the United States, we will evaluate this goodwill and other intangible assets for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Estimated fair values could change if, for example, there are changes in the business climate, unanticipated changes in the competitive environment, adverse legal or regulatory actions or developments, changes in capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows, or market capitalization. Because of the significance of our goodwill and intangible assets, any future impairment of these assets could require material non-cash charges to our results of operations and have a material adverse effect on our financial results.
We share certain directors with Alliance Boots and certain of our officers serve on the Alliance Boots Board of Directors, which may give rise to conflicts of interest.
In connection with our initial 45% investment in Alliance Boots on August 2, 2012, we obtained the right to appoint four designees to serve on the Alliance Boots Board of Directors. As of the date of this report, Gregory D. Wasson, President and Chief Executive Officer and a director of Walgreens, Thomas J. Sabatino, Jr., Executive Vice President, General Counsel, Chief Administrative Officer and Corporate Secretary, and Robert Zimmerman, retired Senior Vice President, International and International Chief Administration Officer and currently a consultant to Walgreens, serve as Walgreens' representatives on the Alliance Boots Board of Directors. In addition, Mr. Pessina, Executive Chairman of Alliance Boots, and Mr. Dominic Murphy, an Alliance Boots director and an executive of KKR and certain of its affiliates, joined our Board of Directors. Mr. Pessina and his affiliates and KKR and its affiliates jointly control AB Acquisitions, which holds the remaining 55% of Alliance Boots. These persons may have actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, while our contractual arrangements with Alliance Boots place restrictions on the parties' conduct in various potential conflict situations and related party transactions are subject to review and approval by independent directors in accordance with our related party transaction approval procedures, the potential for a conflict of interest exists when we on one hand, and Alliance Boots on the other hand, consider acquisitions and other corporate opportunities that may be suitable to Alliance Boots and us. Conflicts may also arise if there are issues or disputes under the commercial arrangements that exist between Alliance Boots and us. Similar issues may arise in connection with other investments we make. For example, we and Alliance Boots have the right, but not the obligation, to invest in AmerisourceBergen common stock and to designate up to two members of the AmerisourceBergen board of directors in certain circumstances if we achieve specified ownership thresholds. In May 2014, Walgreens achieved a five percent beneficial ownership threshold and Gregory D. Wasson was designated as a board member of AmerisourceBergen.
Risks Related to the Reorganization
The following risks relate to the Reorganization. The Reorganization is conditioned upon, and will not be completed unless, the second step transaction and related share issuance are completed immediately following the completion of the Reorganization.
The value of the shares of Walgreens Boots Alliance common stock that existing Walgreens shareholders will receive upon the completion of the Reorganization may be less than the value of their shares of Walgreens common stock as of the date of the Special Meeting or the closing of the Reorganization.
The exchange ratio of Walgreens common stock for Walgreens Boots Alliance common stock in the Reorganization is fixed at one-to-one and will not be adjusted in the event of any change in the stock price of Walgreens or the value of Alliance Boots before the closing of the Reorganization. The relative price of shares of Walgreens common stock and the value of Alliance Boots may vary significantly between the date of the Special Meeting and the date of the completion of the Transactions. These variations may be caused by, among other things, changes in the businesses, operations and results of Walgreens and Alliance Boots, market expectations of the likelihood that the Transactions will be completed and the timing of completion, the prospects of post-Transactions operations and synergies, the effect of any conditions or restrictions imposed on or proposed with respect to Walgreens Boots Alliance by regulatory agencies and authorities, general market and economic conditions and other factors. In addition, it is impossible to predict accurately the market price of Walgreens Boots Alliance common stock to be received by Walgreens shareholders after the completion of the Reorganization. Accordingly, the price of Walgreens common stock on the date of the Special Meeting may not be indicative of its price immediately before the completion of the Reorganization and the price of Walgreens Boots Alliance common stock after the Reorganization is completed.
The rights of a shareholder of Walgreens Boots Alliance, a Delaware corporation, will vary in some respects from the current rights of a shareholder of Walgreens, an Illinois corporation.
After the completion of the Reorganization, existing Walgreens shareholders will become shareholders of Walgreens Boots Alliance, a public company incorporated in Delaware, instead of Walgreens, a public company incorporated in Illinois. As a result, rights as a shareholder of Walgreens Boots Alliance will be governed by Delaware corporate law and the Walgreens Boots Alliance certificate of incorporation and bylaws as opposed to Illinois corporate law and the Walgreens articles of incorporation and bylaws. Although many of the differences arising from this change will not have a significant impact on the rights of shareholders, the rights may vary in some respects.
The certificate of incorporation and bylaws of Walgreens Boots Alliance, Delaware law and/or the Company Shareholders Agreement may impede the ability of Walgreens Boots Alliance shareholders to make changes to the Walgreens Boots Alliance Board of Directors or impede a takeover, which could deprive the shareholders of the opportunity to receive a premium for their shares.
Although these provisions generally currently also exist with respect to the Company under its governing documents and the Illinois Business Corporation Act, several provisions of the certificate of incorporation and bylaws of Walgreens Boots Alliance and the Delaware General Corporation Law could make it difficult for shareholders to change the composition of the Walgreens Boots Alliance Board of Directors. In addition, the same and other provisions may discourage, delay or prevent a merger, consolidation or acquisition that shareholders may consider favorable. See also the risk factor above "The second step transaction, if consummated, would reduce the percentage ownership interests of our current shareholders and the principal shareholders of AB Acquisitions may have significant voting influence over matters requiring shareholder approval." Under the Company Shareholders Agreement, the SP Investors and the KKR Investors have agreed to, for so long as the SP Investors have the right to designate the SP Investor Designee (or Mr. Pessina continues to serve as Executive Chairperson or Chief Executive Officer of Alliance Boots) and for so long as the KKR Investors have the right to designate the KKR Investor Designee, respectively, vote all of their shares of common stock in accordance with the Walgreens Boots Alliance Board of Directors' recommendation on matters submitted to a vote of its shareholders (including with respect to the election of directors). These provisions are not intended, however, to make Walgreens Boots Alliance immune from takeovers and instead are intended to protect Walgreens Boots Alliance shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with them and by providing the Walgreens Boots Alliance Board of Directors with more time to assess any potential acquisition proposal.
As a holding company, Walgreens Boots Alliance will be totally dependent on dividends from its operating subsidiaries to pay dividends and other obligations.
After the completion of the Reorganization, Walgreens Boots Alliance will be a holding company with no business operations of its own. Its only significant asset will be the outstanding capital stock of its subsidiaries. As a result, it will rely on payments from its subsidiaries, including Walgreens and Alliance Boots, to meet its obligations. Additionally, Walgreens Boots Alliance's subsidiaries may be restricted in their ability to pay cash dividends or to make other distributions to Walgreens Boots Alliance, which may limit the payment of cash dividends or other distributions to the holders of Walgreens Boots Alliance common stock. Credit facilities and other debt obligations of Walgreens Boots Alliance, as well as statutory provisions, may further limit the ability of Walgreens Boots Alliance and its subsidiaries to pay dividends.
We may not obtain the expected benefits of our reorganization into a holding company structure.
We believe our reorganization into a holding company structure will provide us with benefits in the future. These expected benefits may not be obtained if market conditions or other circumstances prevent us from taking advantage of the strategic, business and other potential flexibility that we expect it will afford us. As a result, we may incur the costs of the holding company structure without realizing the possible benefits. In addition, the holding company structure may not be successful in insulating the liabilities of our subsidiaries from each other or from Walgreens Boots Alliance. We or our future subsidiaries may be liable for the liabilities of one another, particularly if we do not observe corporate formalities or adequately capitalize ourselves or our future subsidiaries.
Walgreens Boots Alliance has no operating or financial history, and results of operations may differ significantly from the unaudited pro forma financial information included in Walgreens' other filings with the Securities and Exchange Commission.
Walgreens Boots Alliance has only recently been incorporated and has no operating history and no revenues. The unaudited pro forma financial information contained in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2014 is presented for illustrative purposes only, is based on certain assumptions and judgments, contains preliminary estimates, addresses a hypothetical situation and covers only the periods presented. The assumptions used in preparing the unaudited pro forma financial information may not prove to be fully accurate, and other factors may affect Walgreens Boots Alliance's financial condition or results of operations following the Transactions. Therefore, the pro forma financial information does not necessarily indicate with accuracy the results of operations or the combined financial position that would have resulted had the Transactions been completed on the dates indicated, and it is not necessarily indicative with accuracy of the results of operations in future periods or the future financial position of Walgreens Boots Alliance. Accordingly, Walgreens Boots Alliance's results of operations and financial condition may differ significantly from those indicated by the unaudited pro forma financial information.
There has been no prior public market for shares of Walgreens Boots Alliance common stock, and the market price of the shares may be volatile.
The market price of shares of Walgreens Boots Alliance common stock may be volatile. Broad general economic, political, market and industry factors may adversely affect the market price of the shares, regardless of Walgreens Boots Alliance's actual operating performance. In addition to the other risk factors identified in this Item 1A, factors that could cause fluctuations in the price of the shares include:
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actual or anticipated variations in quarterly operating results and the results of competitors;
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changes in financial estimates by Walgreens Boots Alliance or by any securities analysts that might cover Walgreens Boots Alliance;
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conditions or trends in the industry, including regulatory changes or changes in the securities marketplace;
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announcements by Walgreens Boots Alliance or its competitors of significant acquisitions, strategic partnerships or divestitures;
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announcements of investigations or regulatory scrutiny of Walgreens Boots Alliance's operations or lawsuits filed against it;
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additions or departures of key personnel; and
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issuances or sales of Walgreens Boots Alliance common stock, including sales of shares by its directors and officers or its key investors, including the SP Investors and/or the KKR Investors.
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