Walgreen (NYSE:WAG), the largest drugstore chain in the U.S., reported sales of $6.37 billion for October 2013, achieving 6.1% annual and 7.6% sequential growth. The company closed its fiscal 2013 on August 31 with $72.2 billion in sales, a 0.8% annual increase, and saw a 13.7% increase in operating income. After witnessing a significant decline in its 2012 revenue base, Walgreen regained its growth momentum following the resolution of its dispute with Express Scripts in September 2012. (See below.) Walgreen reported a 8% year-over-year rise in its September 2013 sales.
Walgreen opened 14 stores and closed two stores during October, which increases its store count to 8,597 locations across 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. A large footprint places the company in a strong position to benefit, both from an aging U.S. population and from the extension to millions of new coverage under the Affordable Care Act.
Quick Snap Shot Of October’13 Sales
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Accounting for 65.5% of total sales, pharmacy sales and comparable store pharmacy sales grew by 7.8% and 7.9% year over year, respectively. Total comparable sales climbed by 5.8% whereas prescriptions filled at comparable stores increased by 5.7% year over year. It was positively impacted by 1.1% higher flu shots. Total front-end sales increased by 3.5% compared to October 2012, as customer traffic and basket size in comparable stores increased by o.6% and 1.7%, respectively.
Calendar 2013 sales year to date stood at $60.47 billion, 4.3% higher compared to the same period last year. By comparison, CVS’s fiscal 2014 year-to-date sales (September and October 2013) are at $12.29 billion, up 7% from $11.49 billion in the comparable period in fiscal 2013.
Our price estimate of $50 for Walgreen is at a 15% discount to the current market price of $60.
Dispute Resolution With Express Scripts Aids Revenue Growth
Walgreen witnessed a notable decline in its market share of total prescriptions filled in the U.S. as the payment dispute with Express Scripts diverted as many as 90 million prescriptions for the first nine months of 2013. Handling prescriptions for millions of people, Express Scripts runs prescription drug plans for employers, insurers and other customers. As a result of the dispute between the two companies, many Walgreen customers switched over to its competitors.
However, Walgreen and Express Scripts entered into a new agreement in September 2013, which allows Express customers to fill prescriptions at Walgreen stores. Walgreen claims to be winning back old customers in the wake of the deal and stated that the proportion of Express Scripts prescriptions returning to its stores continues to rise. It filled a record 821 million retail prescriptions in fiscal 2013 which translates into a 19.1% market share.
Recently, Walgreen and Express Scipts launched a new option for clients that allow them to pick up 90-day supplies of prescription drugs at Walgreen’s retail stores. Known as Smart90 Walgreens, the program will offer plan members convenient access to in-person pharmacist consultations and a wide-range of health and wellness services that can improve medication adherence and lower overall healthcare costs. It provides customers the option to receive their maintenance medications through Walgreen’s retail pharmacy or Express Scripts home delivery service.
Lower Generic Substitution
Generic drugs are comparatively lower priced than branded drugs. The total generic dispensing rate, which factors 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 continued to replace branded drugs in 2013, albeit at a slower pace.
Generic drug substitution in the last 12 months had a 0.7% negative impact on Walgreen’s comparable store sales, compared to a 2% and 9% negative impact on comparable prescription sales in Q4 2013 and Q1 2013 respectively. Walgreen anticipates a low rate of introduction of new generics in the first half of fiscal 2014, which should further 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.