Reporting $5.92 billion in sales, Walgreen (NYSE:WAG) continues its growth momentum with a 8% y-o-y rise for the month of September. As of September ’13, the company’s sales-to-date stood at $54.11 billion, a 4.1% growth compared to the same period last year. Walgreen’s revenue base declined in fiscal 2012 as its dispute with pharmacy benefits management company Express Scripts led to a significant loss in the number of Express Scripts’ prescriptions filled at Walgreen stores. However, post the dispute resolution between the two companies in September 2012, Walgreen has seen its growth accelerate in subsequent months. (Read our earnings article: Walgreen’s Earnings Confirm Its Renewed Growth Momentum)
With a 65% revenue contribution pharmacy sales continue to be the most important segment in Walgreen’s portfolio. For September it reported a 10.4% and 10.2% growth in total pharmacy sales and comparable store pharmacy sales respectively. The company filled 9.6% more prescription at comparable stores last month versus September 2012. Calendar day shifts positively impacted pharmacy sales in comparable stores & prescriptions filled at comparable stores by 2.9%. Front-end sales and comparable front-end sales climbed by 4.1% and 2.9% y-o-y, respectively.
In September, Walgreen opened 17 new stores and closed one store, which increases its store count to 8,590 locations across 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. Walgreen is the largest drugstore chain in the U.S. which places it in a strong position to benefit from an aging U.S. population and the Affordable Care Act expanding insurance to millions of Americans.
Declining Negative Impact Of Generic Drugs
Generic drugs are comparatively lower priced than branded drugs. The total generic dispensing rate, which implies the percentage of generic drugs in a consumer’s prescription grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. Generic drugs had a 2% negative impact on Walgreen’s comparable prescription sales in Q4 2013 as compared to a 9% negative impact in Q1 2013. Generic drug introductions in the last 12 months (including September 2013) negatively impacted total comparable sales by 0.5%.
Walgreen anticipates low rate of introduction of new generics in the first half of fiscal 2014 which can lower the pressure of generic drugs on its top line. Nevertheless, an estimated $15 billion worth of branded product will come off patent in the next three years, opening them to competition from generic drugs. Thus, we expect generics to continue to offset Walgreen’s top line growth in the future as well, albeit at a slower pace.
Our price estimate of $50.46 for Walgreen is at a 10% discount to the current market price.