CVS Caremark Corporation (CVS), Walgreen Company (WAG): Investing in Your Corner Drug Store

Page 1 of 2

As the health care law enters its last few stages of implementation, and with the looming “patent cliff” on the horizon for many drug companies, the state of the health care industry in America is in limbo. One area that is the most curious for many people, and many investors, is in pharmacies, and how they will respond to the growth of generic drugs on the market, as the upcoming patent cliff predicts. While this may mean a downside for drug companies and manufacturers, it liberates customers dependent on prescription drug coverage, as they can choose generic equivalents at cheaper prices. This could be a huge boon for both pharmacies, including CVS Caremark Corporation (NYSE:CVS), Walgreen Company (NYSE:WAG), and Rite Aid Corporation (NYSE:RAD), and investors.

Generics: Bad for drug companies, good for pharmacies

This year, generic drugs are already having an impact on the bottom lines for these three companies, as sales of generic drugs are increasing in the pharmacy stores of each retailer.

CVS Caremark Corporation (NYSE:CVS)

For CVS Caremark Corporation (NYSE:CVS), retail pharmacy volumes increased by 2% last quarter, although the last 3 months saw only a 0.1% revenue increase, and an actual drop in same-store pharmacy sales by 2.3%, though the company attributes this to an early Easter Sunday rather than a sign of long-term malaise. However, the generic dispensing rate has been steadily increasing, and that should help in terms of profiting off sales of generic drugs as they become more numerous with time.

Walgreen Company (NYSE:WAG) has continued its recent winning streak with three straight months of sales growth, posting a 4.3% monthly sales increase, and a 3.3% increase for the quarter. Generic drugs have contributed to Walgreen’s boost in sales at the pharmacy counter, just like at CVS Caremark Corporation (NYSE:CVS). They should keep the chain’s winning streak alive into the summer.

Rite Aid Corporation (NYSE:RAD), though, has been the laggard of these three, and the introduction of generics has not helped as much as it should have. Pharmacy sales have dropped 2.7%, while same store sales also dropped 1.5% year-over-year, which stands in stark contrast to the strong sales figures of their two competitors. It also hasn’t been a good quarter for Rite Aid either, with same store sales dropping 2.8% for the quarter. Generic drug introductions should help the company with its sales, but Rite Aid is showing problems beyond the advantages of the coming “patent cliff” that is helping its competition.

Increasing storefront counts point to future success

On the whole, pharmacies have been popping up in more places across the US, and into other countries for some stores. CVS Caremark Corporation (NYSE:CVS) announced 28 new American outlets during the last quarter, which is the result of a strong quarter that saw a 21% increase in operating profits year-over-year in the first quarter, along with a free cash flow of $1.3 billion for further expansion. Walgreen Company (NYSE:WAG) opened up 12 stores last month, bringing a net increase in storefronts to 70 year-over-year, while Rite Aid Corporation (NYSE:RAD), despite posting a strong May, reported 39 fewer storefronts year-over-year. This isn’t a good sign for Rite Aid, even though gross margins for the company have improved and net income estimates are expected to be a healthy $75-$90 million for the quarter, providing further evidence that Rite Aid has some problems.

Page 1 of 2