Walgreen Battles For Express Scripts Customers As Generics Slow Drugstores Sales

Leading pharmacy chains Walgreen (NYSE:WAG) and Rite-Aid (NYSE:RAD) recently released their monthly sales figures for October 2012. Both companies reported declines in same store sales with Rite Aid’s sales declining 1.1% over the prior year period and Walgreen’s declining 5.9%. Both companies identified the increased proliferation of generic drugs to be a major contributor to the decline.

While Rite Aid reported a 4.7% increase in prescription count at comparable stores, Walgreen saw a decline of 1.8%. Rite Aid and CVS seem to have retained a major chunk of Walgreen’s customers who had migrated over as a result of the latter’s dispute with Express Scripts.

CVS Pharmacy (NYSE:CVS), Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD) compete in the prescription drugs, OTC drugs and general merchandise markets.

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Prescriptions Count To See Limited Improvement At Walgreen

Walgreen introduced a loyalty program and started filling prescriptions of pharmacy benefits manager Express Scripts’ customers mid-September. Both initiatives had their first full month of impact in October which resulted in a sharp improvement in the prescription count filled at Walgreen stores, improving from a 10.3% y-o-y decline in September to 1.8% decline in October. With Tricare keeping Walgreen out of its pharmacy network, the company has lost about 18% of the prescriptions it processed for Express Scripts.

Among the remaining 72%, as a result of aggressive marketing campaigns for their loyalty programs and steep discount offers, Rite Aid and CVS seem to have retained a substantial chunk of prescriptions they gained from Walgreen. While it is too early to confirm this as a long-term trend, you can adjust Walgreen’s market share forecast in the graph above to see the impact of the company regaining only a portion of its lost market share in the long run on its fair value estimate.

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Generic Continue To Derail Top Line Sales Growth

Rite Aid reported a 2.3% decline over the prior year period in pharmacy same store sales during October. This was in spite of the number of prescriptions filled increasing 4.7%. The company attributed an approximate 971 basis points negative impact from new generic introductions on pharmacy same store sales. Walgreen reported a 2.6% decline in pharmacy same store sales in the same period with a negative impact of 9 percentage points due to generic drug introductions.

Blockbusters worth $170 billion in annual sales are scheduled to go off-patent by 2015, and hence the generics will continue to impact top-line sales. As generics carry higher margins, it will be easier for Rite Aid to pay off its huge debt as it grows its sales along with the proliferation of generic drugs.

View our detailed analysis for Rite Aid

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