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Pharmacies & Drug Stores Industry Outlook: Prospects Look Weak

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The Zacks Retail - Pharmacies and Drug Stores industry essentially includes retailing of a range of prescription and over-the-counter medications. The broad retail network of companies within this industry deliver advanced health solutions for patients, customers and caregivers. Their pharmacies dispense millions of prescription medications each year.  

Over the past few years, the scope of retail pharmacy and drugstore market has expanded exponentially.In North America, some of these companies have evolved to add wellness products and groceries to their traditional portfolio of prescription and over-the-counter medications.

Going by Statista data, sales of retail pharmacies and drug stores in the United States will reach approximately $300.26 billion by 2020. The enormous market potential has made this space a happy hunting ground for global healthcare players.

Here are the three major industry themes:

Elderly Population in Focus: The American population is experiencing a major demographic shift with the aging population (65 and above)growing markedly. Naturally, the federal health insurance program is gaining importance. Per data collected in 2017, the Medicare Part D program, implemented in 2006, has more than 42 million participants, with majority being the aging population. Going by a Robert Walthall report, which was published in Shelving Design Systems, seniors are expected to fill nearly 30 prescriptions a year at retail pharmacies, compared to about half that number of individuals aged between 19 and 64.

Pharmacy retailers are gradually realizing this huge and growing market demand for Medicare plan options. According to Walthall, the pharmacy retail behemoths are currently putting efforts to create relationships with physicians and health centers that prescribe medicines to seniors. This apart, they are creating a store environment that appeals to the senior bracket of population by providing accommodations meant to make seniors' shopping experiences easier, more comfortable and more informational.

Beauty and Lifestyle Exposure: With the rise of e-commerce and growing social media participation in brand expansion, there has been a major behavioral shift of consumers. These new-gen consumers, unlike the traditional shoppers, do not hesitate to try different brands depending on product review throughdifferent channels. With this transformation, luxury and necessary lifestyle and wellness brands are emerging fast to bloom into a billion-dollar industry.

To get the most out of it, pharmacy retailers too are not leaving any stone unturned. They are currently joining hands with the independent lifestyle and cosmetic brands. In recent years, drug retailers like CVS Health and Walgreens have made significant efforts to update their beauty offerings. According to an article published in Retail Dive, these two companies currently have an astonishing 48.8% combined market share of the U.S. health and beauty retail market.

Emphasize on Chronic Disease Care: Modern pharmacy retail and drugstore concept aggressively emphasizes on chronic disease care and management. Irrespective of age group, millions of Americans are at present suffering from chronic conditions that require lifestyle modifications and daily maintenance medications. These include Type I and Type II diabetes, heart diseases and dementias such as Alzheimer’s.

As per current data, a very small percentage of the population takes medication as prescribed and tries to make positive changes in their lifestyle, exerting additional pressure on the healthcare system. According to the Centers for Disease Control and Prevention (CDC), three in four aging Americans have multiple chronic conditions, clearly indicating the huge untapped market for pharmacy retailers dealing in chronic condition management. Keeping this in mind, CVS Health recently acquired Aetna and Walgreens is on its way to take over Alphabet’s GOOGL Verily.

Zacks Industry Rank Indicates Bleak Near-Term Scenario

The industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The Zacks Retail - Pharmacies and Drug Stores industry, which is housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #186, which places it in the bottom 28% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate.

Industry Outperforms S&P 500 but Lags Sector on Shareholder Returns 

The Zacks Retail - Pharmacies and Drug Stores industry has outperformed the Zacks S&P 500 composite but underperformed its own sector over the past six months. The stocks in this industry have collectively gained 2.8% over this period while the Retail and Wholesale Sector has moved up 7.4%. However, the Zacks S&P 500 composite has slipped 8.2% over the same period.

Industry’s Current Valuation

One might gain a fair idea of the industry’s relative valuation from its price-to-earnings ratio (P/E ratio), which is commonly used for valuing retail pharmacy and drug store companies.

The industry is currently trading at a forward 12-month P/E ratio of 9.78, which is lower than its median level of 15.3 over the past five years. We also see that the industry is trading lower than the broader industry’s forward P/E ratio of 16.96.

Comparing the industry with the S&P 500 index on the basis of the forward P/E ratio, we see that the industry is trading at a discount to the S&P 500’s 15.39X.

Bottom Line

So far, the bigger retail pharmacy and drug store companies have been maintaining their competitive position on economies of scale in purchasing and access to a large customer base. Meanwhile, smaller companies are competing effectively through convenient locations or special merchandising.

However, with e-commerce giant Amazon’s (AMZN - Free Report) move to foray into the healthcare space along with other non-healthcare mammoths like Berkshire Hathaway Inc. and JPMorgan, the traditional retail pharmacy and drugstore industry is about to undergo a sea change. According to most market watchers, the entry of these heavyweights has the potential to change the face of traditional healthcare system in the United States.

Going by an article published in Wolters Kluwer, with this, the retail pharmacy industry has entered a new phase of fierce competition that is compelling pharmacies to further reduce their prescription profit margins.

This apart, a poor reimbursement environment has been forcing retail pharmacy companies to spend hugely on research and development, seeking for new sources of revenues. In the process of doing so, these companies are currently witnessing increasing pressure on the bottom line.

Below we have discussed three stocks from this space that investors may want to buy or hold on to for the time being.

CVS Health Corp. (CVS - Free Report) : Headquartered in Woonsocket, RI, CVS Health is a pharmacy innovation company with integrated pharmacy care offerings. The Zacks Consensus Estimate for fiscal 2019 EPS has moved up 1.5% in the past 30 days. CVS Health, with a Zacks Rank #2 (Buy) currently, has returned 0.6% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Walgreens Boots Alliance, Inc. (WBA - Free Report) : Founded in December 2014, Walgreens Boots Alliance is the world’s first pharmacy-led, health and wellbeing enterprise. The company includes the largest global pharmaceutical wholesaler and distribution network. In addition, Walgreens Boots Alliance is the world's largest purchaser of prescription drugs and several other health and wellbeing products.

The Zacks Consensus Estimate of $6.52 for current-year EPS indicates 8.3% growth from a year ago. Walgreens Boots, a Zacks Rank #3 (Hold) stock, has returned 8% over the past six months.

Herbalife Nutrition Ltd. (HLF - Free Report) : Based in Los Angeles, CA, Herbalife develops and sells nutrition solutions to consumers interested in weight management and general wellness. It also caters to customers looking for ways to enhance sports and fitness performance. Herbalife has been gaining from its focus on direct selling, which it believes ideally suits its business.

Herbalife LTD. Price and Consensus

Herbalife LTD. Price and Consensus | Herbalife LTD. Quote

The Zacks Consensus Estimate for current-year EPS has moved up 3.6% in the past 90 days. The stock has returned 8.9% in the past six months. This stock also carries a Zacks Rank #3.

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