Rite Aid’s Sales Growth Slows As Newly Launched Generics Are The Likely Culprit

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Rite Aid (NYSE:RAD), the third largest drugstore chain in the U.S., is the only drug store chain in the top three that still releases monthly sales data. While sales in the pharmacy industry mostly remain stable, the extra detail helps us adjust our expectations for the company’s performance prior to their earnings release every quarter. In the previous quarter (ending May), Rite Aid averaged a year-over-year growth rate of 2.9% in the three-month period, slightly higher than the 2.7% reported during the same period a year ago.

How Did Rite Aid’s Sales Fare After Q1?

Two months have gone past, and we now have another two months’ sales data to examine. In both June and July, the company’s same store sales grew a moderate 2.4%, which is significantly lower than the 4.3% growth (average) registered during last year’s June and July combined. Growth rates slowed in both pharmacy and front-end segments, which grew 3.4% and 0.2%, respectively. Last year’s figures were notably higher at 5.7% and 1.2%, respectively.

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While many factors could be at play here, some of the deficit could be attributed to the negative impact from new generic introductions. Generics, being cheaper than branded drugs, drag revenues down for pharmacies. On average, the negative impact of new generic introductions on pharmacy sales in the two-month period was 224 basis points, 20% higher compared to last year. As we mentioned in another post, $47.5 billion in industry sales (in the prior year) will come under threat of patent expiry this year, according to Evaluate Pharma, a firm provides market intelligence, financial data & valuation tools for pharma and biotech industries. As more patents expire, generic equivalents replace branded versions and lead to a lower revenue per prescription.

 Telehealth Stations to be Introduced at Select Stores

All major pharmacy chains, including CVS Health (NYSE:CVS), Walgreens (NASDAQ:WBA) and Rite Aid, have been investing in setting up health clinics within their stores. In a recent post, we discussed how demand for convenient care is driving growth of these clinics. Cost is another factor driving demand for walk-in retail clinics, which have a fixed charge and charge less than other settings such as urgent care centers or physician clinics. Availability at short notice, shorter waiting times and longer opening hours, compared with doctors’ offices, give the retail clinics an upper hand.

While Rite Aid is behind both CVS and Walgreens, in terms of the number of retail clinics, it seems to be looking for newer ways to capture demand. The company recently announced a partnership with HealthSpot, a pioneer in patient and provider driven healthcare technology.

These stations will be equipped with videoconferencing systems through which physicians will remotely interact with consumers. They will also have interactive medical devices like a stethoscope, a pulse oximeter, etc which will enable doctors to examine patients digitally. These booths could also potentially drive additional traffic to the stores, boosting sales. Rite Aid announced that it would open HealthSpot stations in 25 of its stores, stressing on their transformation into a retail healthcare company. Earlier, the company also added PBM services to its portfolio  through the acquisition of Omnicare, aimed at making it a well rounded healthcare service provider.

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Sources: Rite Aid Investor Relations