Chicago, IL – July 20, 2022 – Today, Zacks Equity Research discusses CVS Health CVS, Walgreens Boots Alliance WBA and Amazon AMZN.
Industry: Pharmacy & Drug Store
Link: https://www.zacks.com/commentary/1954205/2-retail-pharmacy-and-drugstore-stocks-to-watch-amid-industry-challenges
The COVID-19 pandemic has significantly changed the structure and trend of the Retail - Pharmacies and Drug Stores industry. On a positive note, amid the supply-chain disruption and continued spread of new virus strains, the retail pharmacy business has been in high demand, thanks to mass testing and vaccination drives and exponentially growing demand for remote patient care.
Particularly, mail-order pharmacies are registering growth on account of telehealth and remote monitoring services, creating unique opportunities for stalwarts within the industry like CVS Health and Walgreens Boots Alliance, which invested strategically in easy patient access to prescription and maintenance medications during this period.
However, the majority of the retail drug store heavyweights have been southbound on the ongoing pharmacy reimbursement pressure. Further, with a decline in the severity of COVID-19, the demand for related health support has decreased compared to the initial phase of the pandemic, resulting in a significant drop in pandemic-led revenue generation for the industry players.
Last but not the least, perceiving the huge growth prospects of this space, there has been a number of new entries in this industry, increasing the competitiveness of the space. Especially, a stalwart like Amazon's entry into the retail drugstore space has created a survival issue among the existing entities.
The Zacks Retail - Pharmacies and Drug Stores industry includes retailing of a range of prescription and over-the-counter medications. The broad retail network of companies within the retail pharmacy industry delivers advanced health solutions to patients, customers and caregivers. 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. Going by a small business chronicle report, CVS Health and Rite Aid are among the "big three" in the drugstore space. However, non-healthcare leaders like Amazon, in 2018, acquired pharmacy delivery startup PillPack to enter the U.S. healthcare space.
Industry Trend Remains Dismal Amid Reimbursement Pressure: 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 witnessing a constant rise in medicine prices, stemming from the rising cost of raw materials of drugs.
The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down the mass demand for prescription as well as over-the-counter drugs and vaccinations. It has been widely observed that patients are replacing prescription medicines with low-cost generic drugs.
Threat of Amazon Entering Brick-And-Mortar: A Business Insider report on May 26, 2021 came up with the speculation that there have been discussions about Amazon setting up stand-alone stores in a few locations, including Boston and Phoenix. Further, per the report, which cites insider sources, Amazon is exploring plans of placing the pharmacies inside Amazon-owned Whole Foods locations.
Earlier, following its entry, the e-commerce giant grabbed a significant chunk of the online pharmacy market from the legacy retail drug store space. Needless to say, this latest speculation has come as a major blow to the industry, putting the retail pharmacy and drugstore stocks in a tighter spot.
Major Role in COVID Support Drives Growth: A number of retail pharmacy players are currently playing a pivotal role in administering COVID-19 vaccination shots. The center has launched Federal-Retail Pharmacy Program for COVID-19 vaccination to increase access to vaccines across the United States.
This segment is contributing significantly to these industry players' top line. Although, at present, the retail pharmacy players are registering a decline in COVID-support-related revenues compared to the initial stage of the pandemic, the ongoing fourth wave might again turn the table in favor of them.
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. 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 Amazon's big move into the healthcare space, the retail pharmacy industry entered a new phase of fierce competition. To counter this rivalry, the companies are strategically attempting to gain in size and scale.
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 #211, placing it in the bottom 16% 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.
We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it's worth taking a look at the industry's shareholder returns and current valuation first.
The Zacks Retail - Pharmacies and Drug Stores industry has outperformed the Zacks S&P 500 composite as well as its sector over the past year. The stocks in this industry have collectively gained 4.6% over this period, while the Retail-Wholesale Sector has declined 30.1%. The S&P 500 composite has dipped 11.2% over the said time frame.
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 10.03X compared with the S&P 500's 19.69X and the sector's 20.98X.
Over the last five years, the sector has traded as high as 13.96X, as low as 7.53X, and at the median of 10.09X.
CVS Health: CVS Health is currently seeing greater engagement in an expanded set of digital health services such as antibody and PCR testing, vaccinations and omni-channel pharmacy. CVS.com is one of the top health websites, with more than 2 billion visits in 2021, up nearly 55% over the prior year.
In CVS Health Retail, amid the pandemic, this segment played a crucial role as part of the company's community-focused strategy. This business witnessed year-over-year growth of 9.2% in the first quarter driven by increased prescription and front store volume, including the sale of COVID-19 over-the-counter test kits, the impact of a weaker cough, cold and flu season in the prior year and pharmacy brand inflation.
Prescriptions filled increased 5.1% on a 30-day equivalent basis compared with the year-ago period. The company administered more than 6 million COVID-19 tests and above 8 million COVID-19 vaccines nationwide in the reported quarter.
The Zacks Consensus Estimate for 2022 revenues indicates a 5.7% rise over 2021. CVS Health, a Zacks Rank #3 (Hold) stock, has risen 15.2% in the past year.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Walgreens Boots: Walgreens Boots continues to make progress in transforming the pharmacy business and the method of delivering healthcare, both through physical stores and digital channels. Currently, the company's U.S. retail business is demonstrating good momentum through digital and omnichannel growth from the myWalgreens loyalty program, owned brand innovation and alternative profit streams. According to Walgreens Boots, the U.S. segment is achieving solid retail comp growth against challenging multiyear comparisons with positive traffic trends as consumers continue to depend on Walgreens Boots for their essential needs.
The Zacks Consensus Estimate for fiscal 2022 earnings indicates a year-over-year decline of 5.3%. However, the long-term expected earnings growth rate is pegged at 5%. Walgreens Boots, a Zacks Rank #3 stock, has lost 1.8% in the past year.
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