The Troubled State of the U.S. Retail Pharmacy Business

The U.S. retail pharmacy business is currently facing significant challenges, as evidenced by the recent bankruptcy filing of Rite Aid and its decision to sell its pharmacy benefit manager and close certain stores.

A Struggling Industry

Although Rite Aid is smaller compared to major pharmacy chains like CVS Health and Walgreens Boots Alliance, its struggles reflect the larger issues plaguing the industry.

Performance Woes

Walgreens, which operates the Walgreens and Duane Reade chains in the U.S., has been an underperformer for quite some time, with its quarterly earnings falling short of expectations just last week. Furthermore, both CVS Health and Walgreens stores have experienced pharmacist walkouts as a result of chronic understaffing and the resulting unsustainable working conditions.

Addressing Concerns

While CVS has taken steps to address pharmacist concerns, Walgreens claims to be attentive to the issues raised by its employees.

Mounting Pressures

The crises facing the U.S. retail pharmacy business stem from various factors, including low profitability, ongoing fallout from the opioid litigation, and questionable acquisitions made by several players in the industry.

Sector-Wide Impact

According to Raymond James analyst John Ransom, these same factors are affecting the entire sector. Ransom predicts that Walgreens will experience a staggering 58% decline in core retail earnings between 2019 and 2024. This decline is driven by decreasing pharmacy reimbursement, rising labor costs, and a stagnation in front-end sales. Ransom suggests that in order for the situation to improve, there needs to be a reduction in the number of drugstores across the country.

Bankruptcy for Rite Aid

The bankruptcy filing by Rite Aid on Monday was not unexpected, as it had been widely anticipated by investors since late August. The company is facing numerous lawsuits related to its role in dispensing prescription opioids, as well as $3.3 billion in long-term debt. The bankruptcy filing will pause the opioid lawsuits and enable Rite Aid to settle the claims within the bankruptcy court.

Rite Aid: A Troubled Financial History

Rite Aid, a prominent retail pharmacy chain, has been grappling with financial challenges for quite some time. Even before the opioid litigation crisis, the company faced setbacks in its earnings. In fact, within the last six years, Rite Aid reported negative earnings per share in four of them, with one year showing zero earnings.

In its 2023 fiscal year, which concluded in March, Rite Aid’s pharmacy segment generated a mere $288.1 million in earnings before interest, taxes, depreciation, and amortization. This amount accounted for just 1.6% of its revenues. Clearly, the company’s financial performance has been less than satisfactory.

Part of Rite Aid’s financial troubles can be traced back to its debt accumulation. In 2015, the company acquired a pharmacy benefit manager, now known as Elixir, for a staggering $2 billion. Subsequently, in 2020, Rite Aid acquired Bartell Drugs, a local chain, for $95 million. Unfortunately, despite these acquisitions, Rite Aid’s financial situation did not significantly improve. Moreover, its merger plans with Albertsons and its potential acquisition by Walgreens fell through, adding to its challenges.

A New Plan for Revitalization

Recognizing the need for change, Rite Aid recently unveiled a new plan to revive its retail business. One of the key components of this strategy involves closing an undisclosed number of stores. Rite Aid aims to focus on its portfolio of high-performing stores to drive future success.

In pursuit of financial recovery, Rite Aid has set ambitious goals for its retail segment. By 2025, the company plans to achieve a 3.1% EBITDA margin on revenues of $16.5 billion. This aggressive target reflects Rite Aid’s determination to turn its fortunes around.

Additionally, Rite Aid’s pharmacy benefit manager, Elixir, is currently up for sale. As part of the bankruptcy process, it will be separated from the retail operation. This strategic decision signifies Rite Aid’s commitment to streamlining its business and optimizing performance.

Uncertain Future and Broader Industry Implications

While Rite Aid strives to overcome its financial challenges, its future remains uncertain. The company’s fate is in the hands of the bankruptcy court and its creditors. Meanwhile, the retail pharmacy industry as a whole faces existential questions.

Walgreens and CVS, Rite Aid’s notable competitors, have been venturing into primary care as they seek avenues for earnings growth. However, both companies have encountered obstacles along the way. The ultimate question looms: can any of these industry giants successfully navigate the complexities of the massive retail pharmacy chain and revive the sector?

In conclusion, Rite Aid’s tumultuous financial journey highlights the need for a comprehensive turnaround plan. As the company grapples with its challenges and embarks on a new strategy, the broader industry watches closely to see if any player can effectively transform the retail pharmacy landscape.