Walgreen Company (WAG) & Rite Aid Corporation (RAD): An Indication Of More Gains For One Of The Market’s Best Industries

In 2013, the pharmacy space has been one of the best performing industries. Walgreen Company (NYSE:WAG) and Rite Aid Corporation (NYSE:RAD) have posted YTD gains of 30% and 115% respectively. Strangely, these gains have come as the industry as a whole has seen top-line declines.

During its most recent quarter, Walgreen’s revenue was flat. The company saw total comparable store sales decline 2.6% year-over-year and a 5.2% decline in traffic. Rite Aid was much worse, as its total revenue declined almost 10% year-over-year.

While overall traffic and sales have been declining for the pharmacies, profits have been rising. In an industry with historically low margins, the increase in profit has been viewed as a breath of fresh air.

Walgreen Company (NYSE:WAG), in particular, saw its net income increase almost 11% year-over-year. This impressive improvement was seen despite a 5% increase in SG&A. The company saw its gross profit increase nearly $220 million over the prior year.

The strong profit improvements seen by Walgreen during its last quarter is due to new generic drugs. The company stated in its quarterly report, “the growth in margins was driven primarily by an increase in generic prescription drugs dispensed.” The increase in margins was from 5.9% to 6.5%, which is massive when you’re talking about a company that saw zero growth and has quarterly revenue of almost $19 billion.

In the case of Rite Aid Corporation (NYSE:RAD), the transition from brand to generic drugs has changed the entire scope of its business – from operating as near bankrupt to having financial flexibility. Its difference is significantly more impressive. Remember, a near 10% revenue decline, and the company’s FQ4 net income went from ($161.25 million) to $123.09 million, a difference of more than $280 million!

As Walgreen Company (NYSE:WAG) mentioned – and also Rite Aid Corporation (NYSE:RAD) – the gains are due to an increase in generic scripts. Most are fully aware of the 5%-10% quarterly revenue losses that have been posted by Big Pharma. Those losses are due to the patent cliff and blockbuster drugs losing their patents. As a result, drugs such as Pfizer’s Lipitor have generics, and those generics pay anywhere from 10%-100% more than brand drugs to pharmacies. As a result, it doesn’t matter that volume and total sales are lower, because the companies are making more per script.