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3 Pharmacies & Drugstore Stocks to Watch Amid COVID-19 Resurgence

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Urmimala Biswas
·9 min read
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In the initial pandemic months, the retail pharmacy and drug store industry registered higher sales as a result of panic buying of all kinds of immunity-boosting drugs. However, in these months limited international trade rattled the global supply chain of all drug types. Also, sales of other major drugs and anti-infectives fell significantly, curtailing profit margins of the industry players. The situation improved in the second half of 2020 with gradual opening of the global economy. Although the resurgence of infections and the emergence of new virus strains has again led to some restrictions, the industry players are generating huge business while actively taking part in the process of vaccine rollout.

Mail order pharmacies are registering growth on account of telehealth and remote monitoring services. However, small and medium pharma retailers find it hard to invest in online pharmacies. However, this has created unique opportunities for heavyweights within the industry like CVS Health (CVS) and Walgreen Boots (WBA), which invested strategically in easy patient access to prescription and maintenance medications during this period.

The current frontrunner in the industry is Herbalife (HLF).

About the Industry

The Zacks Retail - Pharmacies and Drug Stores industry essentially includes retailing of a range of prescription and over-the-counter medications. This is distinctively different from the concept of hospital pharmacy wherein drugs are usually sold strictly under the prescription of hospital doctors.

The broad retail network of companies within retail pharmacy industry delivers advanced health solutions to patients, customers and caregivers. Their pharmacies dispense millions of prescription medications each year. Over the past few years, the scope of retail pharmacy and drugstore market has expanded exponentially. In North America, some of these entities evolved to add wellness products and groceries to their traditional portfolio of prescription and over-the-counter medications.

The Retail - Pharmacies and Drug Stores industry is known for heavy consolidations. Going by a small business chronicle report, Walgreens Boots, CVS Health and Rite Aid (RAD) are commonly referred to as the "big three" in the drugstore space. However, non-healthcare leaders like Amazon (AMZN) and Berkshire Hathaway, which are on the brink of floating major healthcare ventures, by and large affected the business of the Retail - Pharmacies and Drug Stores players.

4 Trends Shaping the Future of the Retail - Pharmacies and Drug Stores Industry

Industry Trend Remains Mixed Amid the Pandemic: Brand name drugs, which hold wide profit margins, are protected with a reliable supply chain. However, low-margin generic drugs, which have a fragile supply chain network, have been bearing the brunt of the pandemic-induced economic slump. Drug retailers are also suffering from significant rise in medicine prices, stemming from rising cost of raw materials of drugs. At the same time, a number of retail pharmacy players are taking pivotal role in administering COVID -19 shots. The center has recently launched Federal Retail Pharmacy Program for COVID-19 Vaccination, which is a collaboration between the federal government, states and territories and 21 national pharmacy partners and independent pharmacy networks to increase access to COVID-19 vaccines across the United States. Walgreens, CVS Health, Rite Aid, Kroger are some of the participants. For the next few quarters, unless the vaccination process gets properly completed, this latest line of opportunity is expected to contribute significantly to these industry players’ top line.

Online Pharmacy and Mail Order Boom: The widespread shelter-in-place regulations since the beginning of the pandemic have created a significant shift in demand toward mail order and online pharmacy from traditional brick and mortar pharmacies. However, experts say that this transition is expected to last even after the pandemic is over. Data claims that COVID-19 has only accelerated the already-growing demand for e-pharmacy and mail-ordered home delivery systems. Going by a Patch report, “Two years ago, 11% of U.S. adult pharmacy customers got their prescription from an online pharmacy, based on a survey conducted by market research firm CivicScience, [.] That figure has been steadily rising over the years, according to Statista.com, an online statistics portal.” With e-commerce giant Amazon’s big move into the healthcare space, retail pharmacy industry entered a new phase of fierce competition. To counter this rivalry, the companies operating in the space are strategically attempting to gain in size and scale, both organically and inorganically.

Prescription Drug Inflation Continues: In the pre-COVID-19 period too, this industry was entangled in the issue of continuous rise in drug cost. Going by a January 2020 Fortune report, more than 3,400 prescription drugs’ prices were hiked in the first six months of 2019, reflecting a 17% increase from the year-earlier tally. This, in turn, led patients to replace prescription medicines with low-cost generic drugs. The trend largely hurt the business of the likes of Walgreens Boots and Rite Aid through 2019. Meanwhile, 3 Axis Advisors predicts that in 2020, nearly 500 prescription drugs will be costlier as drugmakers proceed with price increases averaging 5% (published in in-pharmatechnologist article).

Emphasis on Chronic Disease Care: The modern pharmacy retail and drugstore concept stresses on chronic disease care and management. Irrespective of age group, millions of Americans are at present suffering from chronic conditions that require lifestyle modifications and daily maintenance medications. These include Type I and Type II diabetes, heart diseases and dementia, such as Alzheimer’s. Per current data, a very small percentage of the population takes medication as prescribed and tries to bring positive changes in their lifestyle, thus exerting additional pressure on the healthcare system. Per the Centers for Disease Control and Prevention (CDC), three in four aging Americans have multiple chronic conditions, clearly indicating the hugely untapped market for pharmacy retailers dealing with chronic condition management. Keeping this in mind, CVS Health acquired Aetna.

Zacks Industry Rank Indicates Strong Near-Term Prospects

The industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. The Zacks Retail - Pharmacies and Drug Stores industry, housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #63, placing it in the top 25% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of optimistic earnings outlook for the constituent companies in aggregate.

Industry Outperforms S&P 500 & Sector

The Zacks Retail - Pharmacies and Drug Stores industry has outperformed the Zacks S&P 500 composite as well as its own sector over the past three months. The stocks in this industry have collectively gained 9.7% over this period while the Retail-Wholesale Sector has moved down 1.2%. The Zacks S&P 500 composite has increased 8.5% over the said time frame.

Three-Month Price Performance

Industry’s Current Valuation

One might derive a fair idea of the industry’s relative valuation from its price-to-earnings ratio (P/E ratio), which is commonly used for valuing retail pharmacy and drug store companies.

The industry is currently trading at a forward 12-month P/E ratio of 9.42, close to its five-year low of 7.42. We also see that the industry is trading lower than the broader industry’s forward P/E ratio of 30.38.

Price-to-Earnings Forward Twelve Months (F12M)

Comparing the industry with the S&P 500 Index on the basis of the forward P/E ratio, we see that the industry is trading at a discount to the S&P 500’s 22.71.

Price-to-Earnings Forward Twelve Months (F12M)

3 Stocks Likely to Keep Moving Higher

Herbalife: This nutrition products company’s percentage of U.S. business is growing through distributors who operate a Nutrition Club model, which represents the majority of its volume in the country. Amid the pandemic, the company witnessed growth in average number of unique customers. Recently, the company launched its segmentation initiative in nine markets in EMEA. The initial adoption of the program and the distributor engagement are quite encouraging as of now. The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year increase of 5.1%. Herbalife, a Zacks Rank #2 (Buy) stock, has gained 38.9% in the past year.

Herbalife Price and Consensus

CVS Health: CVS Health’s specialty digital solutions for patients witnessed a 25% CAGR over the past two years, and since the start of the pandemic the company has been seeing a significant part of its specialty orders being placed digitally. In this period, CVS Health’s consumer centric digital strategy has become even more relevant as people are using technology more while they stay at home. This trend began in January and accelerated with COVID-19.The Zacks Consensus Estimate for 2022 earnings indicates year-over-year increase of 7.5%. CVS Health, a Zacks Rank #3 (Hold) stock, has risen 16.8% in the past year.

CVS Health Price and Consensus

Rite Aid Corporation: Rite Aid has been providing home service delivery to customers with an eligible prescription, with the benefit of zero delivery fees. Moreover, it launched Buy Online Pickup In Store initiative in a bid to offer better drive through and curbside pickup options. Apart from this, the surge in demand for Tele Health in the wake of COVID-19 has led the company to accelerate the launch of Rite Aid Virtual Care. As part of its corporate strategy and growth plan, Rite Aid is currently focused on strengthening its foothold in mid-market PBM, innovation across its retail and mail-order pharmacy channels. In this line, the company revamped more than 700 stores and is likely to complete the rest in 2021. The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year increase of 326.7%. Rite Aid, a Zacks Rank #3 stock, has gained 55% in the past year.

Rite Aid Price and Consensus

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