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Zacks Industry Outlook Highlights: CVS, Walgreens Boots, Rite Aid, Amazon and Herbalife

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For Immediate Release

Chicago, IL – October 26, 2020 – Today, Zacks Equity Research discusses the Retail - Pharmacy, including CVS Health (CVS - Free Report) , Walgreens Boots (WBA - Free Report) , Rite Aid (RAD - Free Report) , Amazon (AMZN)and Herbalife (HLF - Free Report) .

Industry: Retail - Pharmacy

Link: https://www.zacks.com/commentary/1080686/2-top-retail-pharmacy-and-drug-store-stocks-to-beat-volatility

Like other sectors, the retail pharmacy and drug store industry has been hit hard by the coronavirus pandemic as limited international trade rattled the global supply chain of all types of drugs. In the United States, there was initial panic buying of all kind of immunity boosting drugs during the first few months of the pandemic. Sales of other major drugs and anti-infectives have significantly fallen, curtailing profit margins of retail pharmacists and drug stores.

Throughout this period, mail order pharmacies witnessed growth on account of telehealth and remote monitoring services. Small and medium pharma retailers found it hard to invest in online pharmacies. However, this created unique opportunities for heavyweights within the industry like CVS Health, which invested strategically in easy patient access to prescription and maintenance medications during this period.

About the Industry

The Zacks Retail - Pharmacies and Drug Stores industry essentially includes retailing of a range of prescription and over-the-counter medications. This is distinctively different from the concept of hospital pharmacy wherein drugs are usually sold strictly under the prescription of hospital doctors.

The broad retail network of companies within the retail pharmacy industry delivers advanced health solutions to patients, customers and caregivers. Their pharmacies dispense millions of prescription medications each year.  Over the past few years, the scope of the retail pharmacy and drugstore market has expanded exponentially. In North America, some of these entities evolved to add wellness products and groceries to their traditional portfolio of prescription and over-the-counter medications.

The Retail - Pharmacies and Drug Stores industry is known for heavy consolidations. Going by a small business chronicle report, Walgreens Boots, CVS Health and Rite Aid are commonly referred to as the "big three" in the drugstore space. However, non-healthcare leaders like Amazon and Berkshire Hathaway, which are on the brink of floating major healthcare ventures, by and large affected the business of the Retail - Pharmacies and Drug Stores players.

4 Trends Shaping the Future of the Retail - Pharmacies and Drug Stores Industry

Industry Disruption Amid the Pandemic: Brand name drugs, which hold wide profit margins, are protected with a reliable supply chain. However, the low-margin generic drugs, which have a fragile supply chain network, have been bearing the brunt of the pandemic-induced economic slump. Drug retailers are also suffering from significant rise in medicine prices, stemming from rising cost of raw materials of drugs. Going by an Ameex USA report, the API (Active Pharmaceutical Ingredient) plant for generic drugs is often overseas. India and China dominate the API market. The API may be manufactured in a single plant and each stage holds very little inventory.

The ongoing pandemic situation, which has resulted in production disruption, is causing drug shortage, particularly in emergency care, anesthesia care, and pain management and for antibiotics, vitamins and other essential medicines. Needless to say, this is taking a toll on the retail pharmacy and drug store business.

Online Pharmacy and Mail Order Boom: The widespread shelter-in-place regulations since the beginning of the pandemic have created a significant shift in demand toward mail order and online pharmacy from traditional brick and mortar pharmacies. However, experts say that this transition is expected to last even after the pandemic is over. Data claims that COVID-19 has only accelerated the already-growing demand for e-pharmacy and mail-ordered home delivery systems. Going by a Patch report, “Two years ago, 11% of U.S. adult pharmacy customers got their prescription from an online pharmacy, based on a survey conducted by market research firm CivicScience.

That figure has been steadily rising over the years, according to Statista.com, an online statistics portal.”With e-commerce giant Amazon’s big move into the healthcare space, retail pharmacy industry entered a new phase of fierce competition. To counter this rivalry, the companies operating in the space are strategically attempting to gain in size and scale, both organically and inorganically.

Prescription Drug Inflation Continues: In the pre-COVID-19 period too, this industry was entangled in the issue of continuous rise in drug cost. Going by a January 2020 Fortune report, more than 3,400 prescription drugs’ prices were hiked in the first six months of 2019, reflecting a 17% increase from the year-earlier tally. This, in turn, led patients to replace prescription medicines with low-cost generic drugs.

The trend largely hurt the business of the likes of Walgreens Boots and Rite Aid through 2019. Meanwhile, 3 Axis Advisors predicts that in 2020, nearly 500 prescription drugs will be costlier as drugmakers proceed with price increases averaging 5% (published in in-pharmatechnologist article).

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

Per current data, a very small percentage of the population takes medication as prescribed and tries to bring positive changes in their lifestyle, thus exerting additional pressure on the healthcare system. Per the Centers for Disease Control and Prevention (CDC), three in four aging Americans have multiple chronic conditions, clearly indicating the hugely untapped market for pharmacy retailers dealing with chronic condition management. Keeping this in mind, CVS Health acquired Aetna.

Zacks Industry Rank Indicates Weak Near-Term Prospects

The industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The Zacks Retail - Pharmacies and Drug Stores industry, housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #208, placing it in the bottom 18% 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 pessimistic earnings outlook for the constituent companies in aggregate.

Industry Underperforms S&P 500 & Sector

The Zacks Retail - Pharmacies and Drug Stores industry has underperformed the Zacks S&P 500 composite as well as its own sector over the past three months. The stocks in this industry have collectively dipped 7.1% over this period while the Retail-Wholesale Sector has moved up 12.5%. The Zacks S&P 500 composite has increased 6.3% over the said time frame.

Industry’s Current Valuation

One might derive 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 7.94, near its five-year low of 7.66. We also see that the industry is trading lower than the broader industry’s forward P/E ratio of 32.53.

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 22.2.

2 Pharmacies and Drug Stores Stocks Likely to Keep Moving Higher

CVS Health: Amid the coronavirus crisis, CVS Health’s consumer centric digital strategy has become even more relevant as people are using technology more while they stay at home. So far in this period, the company achieved higher levels of engagement across its digital assets. This trend began in January and accelerated with COVID-19.

Through the end of July, the company administered approximately 2 million COVID-19 tests with the vast majority scheduled digitally as a result of a highly adaptable consumer centric digital health strategy. The Zacks Consensus Estimate for 2021 earnings indicates year-over-year increase of 4.3%. CVS Health, a Zacks Rank #2 (Buy) stock, however, has declined 7.1% in the past three months.

Herbalife: This nutrition products company’s percentage of U.S. business is growing through distributors who operate a Nutrition Club model, which represents the majority of its volume in the country. Amid the pandemic, the company witnessed growth in average number of unique customers.The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year increase of 5.7%. Herbalife, a Zacks Rank #2 stock, has declined 7.6% in the past three months.

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