Making Bets on Pharmacies

Brittney Barrett |

The recent earnings for drugstores seem to indicate solid growth compared to the falling numbers in other sectors and the recent movement among top companies from CVS (CVS) to Rite Aid (RAD). For those considering an investment in the sector, there are a number of current news factors that could help some companies achieve above and beyond expectations and others may be dealt a major blow in the next quarter.

Walgreen's (WAG) is currently engaged in a dispute with Express Scripts (ESRX), a pharmacy benefit management company supporting clients  from health maintenance organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, and Government health programs. The absence of ESRX clientele would be a major loss for Walgreen Co. bottom line. The failure for the two companies to reach a resolution that would keep Walgreen stores in the pharmacy-benefit manager's network represents major potential losses for Walgreen’s, at least according to the Credit Suisse analyst Edward Kelly. Kelly downgraded shares of the company from Outperform to Neutral in a note today alongside pessimism surrounding a conclusion to the deal.

In terms, of Express Scripts, the company is confident strong client support will allow them to move forward on the years plans in the absence of a replacement pharmacy without losing too many clients.

What is Walgreen’s loss is a gain for the other top names where Scripts clients will now patronize to have their prescriptions filled. Kelly recommended Rite Aid as a candidate to benefit from the windfall of Walgreen’s exit.

CVS has also shown promise both in terms of its earnings and the potentiality of new clients from Scripts. Net revenues at CVS grew by 12.5 percent to a record $26.7 billion with pharmacy services expanding by 25.8 percent even before the addition of new clients abandoning Walgreen’s.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AIM.PR.A:CA Aimia Inc. Cumulative Rate Reset Preferred Shares 12.45 -0.04 -0.32 5,000
RAD Rite Aid Corporation 8.15 0.07 0.87 7,774,399
ESRX Express Scripts Holding Company 70.45 -5.40 -7.12 15,635,360
CVS CVS Health Corporation 78.07 -2.46 -3.05 14,156,331

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