CVS and Walgreens Were Reeling From Pandemic, but Fortunes Have Changed

This spring, something changed: Covid-19 turned into a moneymaker.

The nation’s largest retail pharmacy chains say consumers coming for vaccines are spending money in stores. Some vaccine recipients are switching their prescriptions to the chain where they got their shots. CVS, for instance, said it expects a 2% bump this year in so-called front-store sales, which don’t include prescriptions, at locations offering vaccines. The chains have launched a string of products, including at-home test kits, at-home antibody tests, and Covid-19 tests for people with no symptoms or exposure—for which companies generally collect out-of-pocket fees.

U.S. employers are paying for return-to-work programs, in which retail pharmacies charge thousands of dollars to vaccinate workers to facilitate staffing of offices and factories.

“One thing has become crystal clear during the past year of the pandemic: The importance of the pharmacy providing healthcare in the whole community,”

Alexander Gourlay,

Walgreens co-chief operating officer, said in March as the company lifted its annual forecast, citing revenue from shots and Covid-19 tests and higher vaccine reimbursement rates.

Vaccines have become more lucrative. The amount that the U.S. Centers for Medicare and Medicaid Services pay pharmacies and other providers rose this spring to $40 for each dose, up from $28 for a single dose and $45 for two doses. Now for the required two doses for the

Pfizer

and Moderna vaccines, CVS and Walgreens are getting nearly double what they were getting before. Shots are free to the public.

A variety of industries—from videoconferencing services, to makers of household goods to workout-equipment manufacturers—benefited from booming demand amid the pandemic. CVS and Walgreens, which dominate the retail pharmacy landscape with nearly 20,000 U.S. locations between them, have experienced a wrenching transformation.

The two chains headed into the pandemic with sagging share prices, CEOs under fire and questions around the companies’ ability to compete with a growing number of online rivals.

Nearly 18 months after the U.S. recorded its first Covid-19 case, the companies say testing and vaccination against the disease have contributed hundreds of millions of dollars in revenue and are beginning to outweigh the costs of managing the business through the pandemic. CVS shares are up 24% and Walgreens shares are up 34% so far this year, both outpacing the broader market.

Demand for the vaccine remains a big variable. CVS in May said lower-than-expected vaccine uptake meant the company would see a slightly smaller boost to prescription volume. Walgreens said its financial forecasts are based on giving between 26 million and 34 million vaccines in its fiscal year ending Aug. 31. The companies anticipate bumps in vaccination demand from recently eligible 12- to 15-year-olds and from booster shots, which could become recommended later this year or in 2022.

Other factors have bolstered the two companies. CVS says benefits from its 2018 acquisition of health insurer Aetna are beginning to show, while Walgreens has slashed costs and launched an array of strategic partnerships. Within the past year, both companies have ushered in new chief executives.

“A few years ago, they were a mess,” said

Ari Singh,

an analyst at mutual-fund giant Neuberger Berman, which invests in CVS. “The big question was always, ‘Was the drugstore model in secular decline?’ and most people said, ‘Yes.’”

Before the pandemic, CVS and Walgreens were struggling with woes both shared and individual. They faced competition from

Amazon.com Inc.

and were under pressure to respond to the e-commerce giant’s foray into the online pharmacy business. They also were getting squeezed by smaller profits on the sale of generic drugs.

The companies each tried to alter course with deals, Walgreens by buying nearly 2,000

Rite

Aid stores and CVS with its $69 billion acquisition of Aetna.

The companies also pinned their futures to the concept of a health hub, in which drugstores would become places where patients go to seek medicine, consultations and lab tests to manage chronic conditions such as diabetes and hypertension. Walgreens, in a $1 billion deal with startup VillageMD, is attaching doctors offices to hundreds of drugstores.

Meantime in 2020, for the first time in decades, the largest U.S. drugstore chains—CVS, Walgreens and

Rite Aid Corp.

RAD -0.65%

—reduced their collective store count, ending years of expansion that had flooded U.S. cities with pharmacies.

“Changes were coming. What Covid did was hyperspeed up the process,” said

Syed Husain,

managing director or

P.J. Solomon’s

pharmacy business.

The first U.S. Covid-19 test, developed by the Centers for Disease Control and Prevention and cleared for emergency use by federal regulators, launched in January. Within a few months, CVS and Walgreens had started testing at a handful of locations with a plan, brokered with the Trump administration, to expand into pharmacies across the country. The companies raced to add sites, at times struggling with lab backlogs and massive demand in hard-hit areas.

Executives of CVS and Walgreens said the pandemic was costing them hundreds of millions in lost revenue and added expense. The chains agreed with U.S. officials to waive copays on services such as Covid-19 testing and virtual doctor’s visits, while CVS paused conversions of drugstores into health hubs and Walgreens halted its cost-cutting program.

All the while the companies jockeyed with each other and with their smaller rivals to claim a bigger role in the nation’s pandemic efforts even if it added significant costs.

By late 2020, CVS and Walgreens were testing people at thousands of U.S. locations while working with federal health officials on a plan to vaccinate residents and workers at long-term-care facilities. The effort reached fewer people than officials hoped, stymied by such factors as a smaller-than-anticipated number of residents in long-term-care facilities and vaccine hesitancy on the part of staff.

Early this year both companies changed the way they talked about the business calculus of Covid-19. They also scooped up data on millions of customers as people signed up for shots, entering them in patient systems and having recipients register customer profiles.

Walgreens, in raising its annual forecast in March, said money made from administering Covid-19 vaccines should begin to offset pandemic-related losses.

CVS, which has said the vaccines are more profitable than a typical prescription, has said it expects Covid-19 products and services to add about $400 million in revenue this year to the company’s retail unit that includes prescriptions. In the year’s first quarter, pharmacy revenue was up 3.5%, in part due to Covid-19, the company said.

“That type of exposure is invaluable as consumers seek out alternative sites of care,” a CVS spokesman said. “Bottom line, as testing and vaccinations continue we expect an ongoing positive business impact.”

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