Walgreens Boots Alliance (WBA) stock plummeted 20% Thursday morning on the news the company slashed its profit guidance, the second time it has adjusted guidance downward in the year.

Walgreens now estimates earnings per share of between $2.80 and $2.95, down from guidance of $3.20 to $3.35 last quarter — when it narrowed guidance on the upper end.

Investors are watching the company closely as CEO Tim Wentworth executes a new strategy for the company. He is focused on what he views as revitalizing pharmacies and pulling back on healthcare services through VillageMD — of which Walgreens is no longer a major stakeholder.

Amid the shift to downsize unprofitable parts of the business, including announcing additional store closures, Walgreens is also fighting a problem that other smaller pharmacies are facing — pricing pressures from prescription drugs.

"We're at the point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently. We are in active discussions ... to align incentives and ensure we are paid fairly," Wentworth said on an earnings call on Thursday.

Company officials expressed concern over pharmacy benefits managers (PBMs) and their role in setting prices for prescriptions, which has squeezed the profit margin on many drugs. Branded drugs, like the popular diabetes and weight-loss drugs from Eli Lilly (LLY) — Mounjaro and Zepbound — and Novo Nordisk (NVO) — Ozempic and Wegovy — provide lower profits for pharmacies. Generics, while lower in cost, have higher profit margins. But the supply of generics has been decreasing amid ongoing shortages.

The net effect is a reduction in profits for the company from prescriptions.

Stores and shrink

The company noted that 100% of its profits come from 75% of its stores, though Walgreens has yet to identify how many of the 25% will close.

Walgreens has also faced shrink — a problem plaguing the retail world at-large — amid inflation that is reducing customers' discretionary spending. That is forcing the company to rethink its products. As a result, stores have reduced their offerings, shifting to preferred partner brands as well as Walgreens' in-house brand.

Company officials said on the call Thursday that the strategy moving forward will consider where the company needs to funnel its resources — maintaining clinical trials, incentivizing store managers, building up specialty pharmacy — in a way that doesn't "distract" from shareholder value and helps boost profits.

Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. Follow Anjalee on all social media platforms @AnjKhem.

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