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Why Are Walgreens and CVS Shares Surging Today?

Ryan McQueeney
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Shares of several major pharmaceutical retailers—including Walgreens WBA and CVS Health CVS—surged in afternoon trading Monday after reports emerged that e-commerce behemoth Amazon AMZN has shelved its plan to sell prescription drugs to doctors and hospitals.

According to CNBC, Amazon’s now-paused plan involved Amazon Business, a service that sells bulk items to business customers. The company was considering using this unit to begin selling pharmaceutical products but has decided to focus on selling less-sensitive medical supplies to hospitals and smaller clinics, CNBC reported.

The original report suggested that Amazon was not able to convince bigger customers to change their traditional purchasing process. This existing structure typically involves longstanding relationships and a number of middlemen.

What’s more, Amazon would have needed to build a sophisticated supply chain capable of handling temperature-sensitive pharmaceutical products, according to people familiar with the matter cited by CNBC. Still, Amazon has reportedly not ruled out getting into the prescription business at a later time.

Amazon is hardly new to the medical supplies market—the company holds the licensing needed to sell products like glucometers and stethoscopes in 47 states—but traditional industry players have a logistical and strategic advantage over the relative newcomer.

“Amazon Business serves healthcare customers of all sizes, from large IDNs [integrated delivery networks, meaning systems that provide both medical services and a health insurance plan to patients] to small- and medium-sized community hospitals,” Amazon told CNBC. “We also serve customers from physician and dental offices to senior living and long-term care facilities.”

Earlier reports that Amazon was looking to expand into the prescription market rattled retailers like CVS and Walgreens. Shares of these companies surged on the news that Jeff Bezos and company were putting a pause on the idea.

CVS popped nearly 8% to touch an intraday high of $68.90 in early afternoon trading, while Walgreens added about 7% to reach $68.15. Both of these stocks have now bounced off their 52-week lows in the low $60s.

Nevertheless, the story in terms of analyst outlook for CVS and Walgreens has been quite a bit different recently. Estimates for Walgreens’ full-year earnings have trended higher, with the Zacks Consensus Estimate adding 14 cents over the past 60 days on the back of strong analyst agreement. The company is now projected to witness EPS growth of 16% in 2018.

Meanwhile, CVS has witnessed three revisions to its full-year earnings estimates, with 100% agreement to the downside. The Zacks Consensus Estimate for the company’s annual earnings has lost four cents over the past 60 days. This negative revision activity has earned the stock a Zacks Rank #4 (Sell).

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
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