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Rite Aid Corporation (RAD): Generic Drugs Leave This Company Feeling Sick

Generic drugs are good for consumers’ wallets, but they aren’t good for many other players in the medical industry. Pharmaceutical companies that spend billions of dollars to develop brand name drugs feel the pinch when patents run out, and generics flood the market. Apparently, so do drug stores.

Rite Aid Corporation (NYSE:RAD)

Rite Aid Corporation (NYSE:RAD) said today that same store sales fell 2% in March from a year earlier, driven by a decline in drug sales. Sales in the pharmacy, which accounts for 67.6% of overall revenue at Rite Aid Corporation (NYSE:RAD), fell 4.5%, despite prescriptions rising slightly. This means that lower cost drugs, particularly in the form of generics, have taken a bite out of sales for Rite Aid Corporation (NYSE:RAD).

The small silver lining is that the rest of the store is doing quite well. Front-end same-store sales, which is everything outside of the pharmacy, rose 3.8%, helped by a boost in Easter sales.

An industry trend takes hold
This is going to be a challenge for the industry going forward, and will also impact Walgreen Company (NYSE:WAG)’s and CVS Caremark Corporation (NYSE:CVS). Walgreen Company (NYSE:WAG) reported a 0.7% rise in same-store sales for March, which was below expectations, showing similar trends as Rite Aid Corporation (NYSE:RAD)’s. The company’s same-store pharmacy sales fell 1.5%, not as bad as Rite Aid Corporation (NYSE:RAD), but still not a strong sign for the drug business.

CVS Caremark Corporation (NYSE:CVS) doesn’t give the same-store sales data like Rite Aid Corporation (NYSE:RAD) and Walgreen Company (NYSE:WAG)’s but we can assume the trend of more generics and lower pharmacy sales will hold true.

Investors should be careful buying into the declining sales trends at all three companies. As health-care costs have risen, there has been pressure on all parts of the industry to cut costs, and that includes drug stores. That wouldn’t be a problem if the stocks were a screaming value, but Walgreen Company (NYSE:WAG)’s and CVS Caremark Corporation (NYSE:CVS) both have P/E ratios above 18, which is expensive considering sales trends, and Rite Aid is a risky turnaround story. That’s too much for this Fool to pay to get into the drug business.

The article Generic Drugs Leave Rite Aid Feeling Sick originally appeared on

Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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