Rite Aid Is Worth $1.50 On Demand For Generics As Competition Heats Up

by Trefis Team
Rite Aid
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Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., reported last week that revenues were down 0.6% to $6.2 billion in Q2 as a result of decrease in pharmacy same store sales and store closings. The front-end same store sales were up 1.4%, and the company gained from the additional prescriptions resulting from the previous Express Scripts/Walgreen impasse. It faces tough times ahead as a result of the renewed Walgreen-Express Scripts deal and the proliferation of generic drugs in the market which will negatively impact prescription drugs sales. Prescription drugs contribute 70% of our estimate for the company. Rite Aid competes with its bigger peers Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS) and Walmart (NYSE:WMT).

See our complete analysis of Rite Aid

Express Scripts customers could move back to Walgreen

Express Scripts and Walgreen renewed their deal which enables Express Scripts users to fill their prescriptions at Walgreen. The latter is offering a $25 gift card to each user who comes back to their fold. Besides the gift card, the users will now have access to its Balance Rewards loyalty program which was launched mid-September. The program is based on accrued points with the rewards multiplying with more points. The program had a positive reception with almost a million users signing up online before the program was even launched.

Fellow rival, CVS recently announced Double Quarterly Rewards program, targeted at the users it gained because of the Express Scripts/Walgreen dispute. The program offers its ExtraCare members 4% back instead of the usual 2% on nearly all dollars spent on everyday purchases. The Rewards earned will be paid out starting January 1, 2013 and could be used like ‘free CVS money’.

In comparison, Rite Aid has not yet announced any extra measures to retain the customers it gained because of the dispute and looks set to loose a major chunk of them. Inertia will help Rite Aid maintain some of them, but many of the customers probably preferred Walgreen for a reason. Transferring prescriptions is not very difficult, and is not enough of a barrier to retain them.

We currently estimate the company’s market share in Retail Prescriptions filled in the US to drop back to 2011 levels when the Express Script-Walgreen deal was still in effect.

Strong outlook for generic drugs

A lot of blockbuster drugs are scheduled to go off-patent by 2015 and will be replaced in the market by generic copycats which would come at a part of the original price. The company stands to loose substantial sales as a result of this proliferation. As a result, it revised projections for same-store sales between a decline of 1% to a gain of 0.25%, down from its June forecast of a 0.5% decrease to a 1% increase. With the generic penetration currently at 80%, up by 4% from prior year, according to Rite Aid Chief Executive John Stadely, we expect the impact to hold steady in the coming quarters as the rate of penetration slows down.

We currently estimate the Revenues per Retail prescription to be $57 down from $60 the previous year.

We have revised our price estimate for Rite Aid  stock to $1.50 which is at a 15% premium to the current market price.

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