Walgreens to Invest $5.2 Billion in VillageMD

Walgreens Boots Alliance Inc.

WBA 5.71%

will pay $5.2 billion to acquire a controlling stake in primary-care network VillageMD as the pharmacy chain seeks to remodel itself as a healthcare provider.

VillageMD operates more than 200 clinics where it has acquired or hired its own physicians and medical staff. Walgreens said the investment will enable it to open doctors’ offices at 600 or more of its drugstore locations by 2025, and another 400 by 2027.

The drugstore company already owns a stake in VillageMD after agreeing last summer to pay $1 billion in equity and debt over the three years in exchange for a 30% stake in the Chicago-based startup. Under the deal announced Thursday, Walgreens will hold a 63% stake in VillageMD.

The deal is the first major strategic move under Walgreens CEO

Rosalind Brewer,

who came to the company from Starbucks in January. Shortly before she joined, the company finalized a deal to sell its pharmacy-wholesale unit to

AmerisourceBergen Corp.

for $6.5 billion and indicated it could use the proceeds to push deeper into healthcare.

“A primary reason we started this partnership to begin with is that they are focused on all patient populations,” Ms. Brewer said on Thursday, noting the chain serves patients insured by private and government plans and those without insurance. “For us to better care for them beyond the pharmacy, our ability to deliver care through owned and partner assets is critical.”

Walgreens said that VillageMD plans an initial public offering in 2022. It will remain a standalone company with its own board and management.

Walgreens and rival

CVS Health Corp.

are in a race to become go-to treatment centers, particularly for patients with costly, hard-to-manage chronic conditions. They are also looking to shift beyond retailing to provide more healthcare services, such as mental-health counseling and chronic care.

Both chains are seeking new ways to counter smaller revenue from prescription drugs, which drive the bulk of their sales. They also are battling

Amazon.com Inc.,

which has drawn shoppers away from physical stores and launched an online pharmacy.

Also Thursday, Walgreens said it would acquire a majority stake in CareCentrix Holdings Inc., a Hartford, Conn.-based home health benefits manager. Walgreens said it derives 85% of its revenue from some 35 million customers who have chronic conditions such as diabetes or heart disease.

Ms. Brewer said CareCentrix and the expanded stake in VillageMD would help the company manage rising costs for high-risk patients. “These are the same patients who frequently visit our stores and meet with our pharmacists,” she said.

The chain will break out a business segment, to be called Walgreens Health, and is investing to make it cheaper and easier to fill prescriptions. Among the plans: employing a strategy called microfulfillment—increasingly popular in retail—to its pharmacy business. The model seeks to speed up the delivery of goods to consumers by supplementing sprawling, centralized distribution centers with smaller, more plentiful operations.

Walgreens has two microfulfillment centers in the Dallas and Phoenix areas serving more than 1,000 of its roughly 9,000 locations. It plans to add another nine by the end of next year, to serve 3,900 stores; and another 22 locations serving 8,500 stores by 2024. The company said the centers will cut working capital costs by $1.1 billion by 2025.

For the latest quarter, Walgreens reported a revenue boost from administering Covid-19 vaccines and tests. The company said it provided 13.5 million vaccinations in the three months that ended Aug. 31, and more than 40 million since the start of the pandemic.

The company posted sales of $34.26 billion for the fiscal fourth quarter, up from $30.37 billion in the same period last year and surpassing Wall Street estimates. Profit rose to $627 million from $373 million in the comparable period last year.

Write to Sharon Terlep at sharon.terlep@wsj.com

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