Is This Pharmacy's Turnaround Done?

By Eric Novinson - June 17, 2013 | Tickers: CVS, RAD, WAG | 0 Comments

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bulls who backed the struggling pharmacy Rite Aid (NYSE: RAD) last year have been rewarded. This pharmacy's turnaround efforts proved the naysayers wrong. Rite Aid is priced like a profitable company now, although by one metric it's still a major bargain. Now investors wonder whether this pharmacy stock's rally can continue. Drug industry trends and other pharmacies' recent moves could help answer this question.

Macro Trends

CVS, (NYSE: CVS) Walgreen, (NYSE: WAG) and Rite Aid can all benefit from health care macro trends. An older population could result in more prescription drug sales. Retail health clinics could serve even more patients, and Accenturejust released a reportabout this topic. The Affordable Care Act could mean more patients visiting physicians, which could also result in more prescription drug sales.

There's also one macro factor that could hurt the pharmacies. Patents on many high profile, expensive drugs have expired in the last few years, and investors often call this situation the patent cliff. The patent cliff explains why the pharmacies have been able to sell more lucrative generic drugs, although it also explains the pharmacies' lackluster overall sales. When the patent cliff ends, the pharmacies' margins could drop.

Revenue

Store closures and the switch to generic drugs have both meant lower revenue for Rite Aid. Both trends remained prominent in May 2013. Rite Aid reported that it has reduced its store count by 37 over the last year. The pharmacy reported -2.7% pharmacy same store sales growth for May, but it also noted that this figure would have risen 1% without recent generic introductions.

The switch to generics has also limited revenue growth for CVS and Walgreen recently. CVS reported -0.1% sales growth last quarter, and Walgreen's total sales were basically unchanged. Facing two competitors that effectively held the line on sales while new generic drugs appeared, Rite Aid's -9.7% sales growth last quarter doesn't look very attractive. CVS and Walgreen currently trade near their annual highs even with relatively flat recent sales, so other factors do come into play for the pharmacies.

Retail Clinics

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Is This Pharmacy's Turnaround Done?