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Rite Aid Corporation (RAD), CVS Caremark Corporation (CVS), Walgreen Company (WAG): The Generic Shift Leaves Pharmacy Investors Well Positioned

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Rite Aid Corporation (NYSE:RAD)All three of the major pharmacy companies, Rite Aid Corporation (NYSE:RAD)CVS Caremark Corporation (NYSE:CVS), and Walgreen Company (NYSE:WAG), operate with similar business models, having both retail and pharmacy segments. Yet for all of these three companies, the pharmacy business is the most watched and produces the greatest difference in sales and margins. With that said, anyone following the space must be glad with what they are seeing develop.

A Top Performing Industry

Company/Index 6 Month Return (rounded)
S&P 500 13%
CVS 27%
Walgreens 40%
Rite Aid 131%

In the last six months all three large pharmacy companies have seen increases in valuation that far exceed the S&P 500, as seen above. This has occurred despite all three companies seeing slowed or a lack thereof growth. Instead of focusing on growth, investors have emphasized margins and volume, in which all three companies showed strength. Furthermore, an industry-wide macro shift to generics has investors excited about the future, as revenue declines, volume increases, and margins are booming!

Same-Store Sales

Company Same-Store Sales (from last quarter)
CVS (2.3%)
Walgreens (2.70%)
Rite Aid (3.10%)

The decline in same-store sales is because of the industry-wide presence of greater generic pressure. The patent cliff in biotechnology has been well-documented and covered as countless billion dollar drugs lost patents in the last 16 months. During this most recent quarter we saw as companies such as Pfizer Inc. (NYSE:PFE),  Bristol Myers Squibb Co. (NYSE:BMY), Eli Lilly & Co. (NYSE:LLY), etc. all saw weakness in year-over-year sales.

The generic companies have been those to benefit, as they each gain generic exclusivity to certain high-profile drugs by offering a smaller discount to consumers, and greater profit sharing with pharmacies. As a result of the prescription price declines overall sales for pharmacy companies have also declined, but with lower sales come much higher margins.

Same-Store Prescription Volume

Company Same-Store Prescription Volume
CVS 2.0%
Walgreens 4.30%
Rite Aid 3.0%

The numbers from this chart above should be very telling to most investors. All three companies saw lower same-store sales yet large boosts in volume, which shows the number of lower priced generic drugs that are being pushed off the shelves. CVS Caremark Corporation (NYSE:CVS) in particular saw the smallest drop in same-store sales yet had the smallest rise in volume. This suggests that CVS Caremark Corporation (NYSE:CVS) is simply operating a much more efficient rate than its competitors — or that it’s not selling generics at the same rate as Walgreen Company (NYSE:WAG) or Rite Aid Corporation (NYSE:RAD) — or that maybe it is yet to transition many of the new generic drugs. For investors of CVS Caremark Corporation (NYSE:CVS) this should be a positive either way, because it suggests that margins will rise in the coming quarters as the company sells a greater number of generic drugs.

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