The U.S. retail pharmacy business is in big trouble. The latest sign came Monday, with a bankruptcy filing from
Rite Aid,
and the announcement that the company will sell its pharmacy benefit manager and close some stores.
Though much smaller than the big U.S. pharmacy chains owned by
CVS Health
(ticker: CVS) and
Walgreens Boots Alliance
(WBA),
Rite Aid
‘s (RAD) problems are emblematic of a struggling industry.
Walgreens, which own the Walgreens and Duane Reade chains in the U.S., is a perennial underperformer; its quarterly earnings came in below expectations last week. Meanwhile, pharmacists at
CVS Health
(CVS) stores and at Walgreens stores in the U.S. have walked out in recent weeks in protest of what they have called chronic understaffing leading to untenable working conditions.
CVS has said it is addressing concerns raised by pharmacists while Walgreens has said it is listening to their concerns.
The crises point to the increasing pressures on the U.S. retail pharmacy business, including low profitability, the lingering fallout of the opioid litigation, and questionable acquisitions by a number of the players.
The same factors are at play across the sector. In a note out Monday, Raymond James analyst John Ransom calculated that Walgreens will see a 58% drop in core retail earnings from 2019 through 2024. Ransom calls it “staggering earnings decline that stems from declining pharmacy reimbursement, labor inflation, and a generational stagnation in front end sales,” and writes that the number of U.S. drugstores needs to drop before the situation improves.
For Rite Aid, the Monday bankruptcy filing wasn’t a surprise, and had been widely anticipated by investors since late August. The company faces a wave of lawsuits over its role in dispensing prescription opioids, and $3.3 billion in long-term debt, according to a company filing. The bankruptcy filing will freeze the opioid lawsuits, and allow the company to settle the claims in the bankruptcy court.
Rite Aid’s financial troubles long predate the late stages of the opioid litigation. The company has reported negative earnings per share in four of the last six years, and $0 in another of those years. In its 2023 fiscal year, which ended in March, the earnings before interest, taxes, depreciation and amortization of Rite Aid’s pharmacy segment was just $288.1 million, or 1.6% of its revenues.
The company has racked up debt, first through the $2 billion acquisition of the pharmacy benefit manager now known as Elixir in 2015, and in 2020 through the $95 million acquisition of a local chain called Bartell Drugs. Meanwhile, a merger with
Albertsons
and an acquisition by Walgreens, both fell through.
On Monday, Rite Aid announced a new plan to turn its retail business around, which will involve closing an undisclosed number of stores. Rite Aid says the new plan hinges on a “portfolio of high-performing stores” and that, by 2025, it will aim for a 3.1% Ebitda margin for its retail segment, on revenues of $16.5 billion.
Meanwhile, the company’s pharmacy benefit manager, a midsize player in the PBM sector called Elixir, is up for sale, and will be separated from the retail operation through the bankruptcy process.
The future of Rite Aid remains uncertain; at the mercy of the whims of the bankruptcy court, and the company’s creditors. For the broader retail pharmacy industry, the questions are similarly existential. Walgreens and CVS are both pushing into primary care in a hunt for earnings growth, and hitting stumbles along the way. The question remains whether any of them can get the massive retail pharmacy chain right, and turn the sector around.
Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com
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