The pharmacy industry has suffered as competitive threats from Amazon (NASDAQ: AMZN) have grown. But that doesn’t mean there aren’t a few opportunities for investors. Before you invest in pharmacy chains, make sure you explore the pros and cons.
Pros and Cons of Investing in Pharmacy Services
The first consideration is the competitive landscape. With the introduction of online retail competitor Amazon (Nasdaq: AMZN), pharmacy chains like Walgreens Boots Alliance (Nasdaq:WBA) and CVS Health Corporation (NYSE:CVS) are hurting.
To make matters worse, the retail pharmacy business may not be able to catch up to Amazon’s success with meeting demand for same day deliveries.
That brings us to the next point. There’s the uptake in online delivery services. Because consumers are changing how they shop, the door has opened to innovative companies that offer free delivery and same-day delivery options.
Then, there’s the concern over the Trump administration’s proposed changes to pharmaceutical business management (PBM). There are plans to implement changes to how a PBM will receive a rebate from a drugmaker.
The Trump administration suggested a focus on rebates may come into play as the White House looks for ways to reduce prices on prescription medications.
In July, Alex Azar, the Health and Human Services Secretary suggested in a speech that the administration would examine rebates and that the practice might be disrupted. The proposed regulation would change legal exemptions for rebates.
There’s been widespread criticism with rebates. On one hand, the practice gives incentives to PBMs opening the door to higher pharmaceutical prices. On the other, there’s been concern over how rebates are received.
In 2018, CVS Health received rebates totaling $300 million. This represented only 3% of EPS. CVS claims that it returns about 98% of rebates back to its clients which present insurers and employers.
Is CVS Stock Worth Buying?
CVS Health Corporation (NYSE: CVS) specializes in pharmacy benefits management and a retail pharmacy business. Trading at only nine times its expected earnings, it appears attractive at first glance to investors.
What’s drawing investors is the company’s valuation and strong business. This is in part due to the MinuteClinic feature CVS Health has added.
CVS’s MinuteClinics are health clinics used at various CVS locations. Revenue at locations featuring these clinics is up 15% from last year during this same time period.
The pharmacy segment of CVS and its PBM are what’s driving its growth. However, the PBM is facing pressure with increasing generic dispensing rates and pricing. Nevertheless, it’s still solid revenue stream for the pharmacy chain.
Value investors may find the CVS dividend attractive. Yielding close to 3%, the dividend was temporarily suspended when CVS acquired Aetna (NYSE: AET), which brings us to the wrench in the wheel.
CVS’s planned Aetna acquisition is projected to close by the close of 2018. The DOJ gave conditional approval to the $69 billion merger. Aetna, which insures over 22 million people, had close to $60 billion in revenue last year.
Larry Merlo, CVS CEO has outlined a new health-care model that’s data-driven and less expensive. It will cater to patients and allow for personal care and convenience. The merger is expected to provide synergies to CVS Health in the $750 million range.
The deal will help lower healthcare costs and integrate new products as the company looks for ways to keep up with Amazon which is disrupting the prescription drug business given its recent acquisition of PillPack over the summer.
Is Walgreen’s Stock A Good Buy?
Similar to CVS, Walgreens stock appears at first glance to be cheap. Walgreens Boots Alliance (Nasdaq: WBA) is trading at 10 times its expected earnings and investors are taking note.
Walgreens has already been in the news due to its purchase of Rite Aid’s 1,900 stores. This led to an increase in market share and revenue.
By adding the Rite Aid stores, Walgreens has been able to increase its profit margins at retail store locations and the retail pharmacy business is working on other strategies.
Walgreens is seeing increased sales in stores that offer beauty products. The company is also exploring experimental clinics to keep up with CVS.
Walgreens is adding LabCorp clinics to select stores. Plus, it is working with FedEx (NYSE: FDX) to offer shipping and delivery services for its retail locations. Another plan in the making is its partnership with Humana (NYSE: HUM). The primary care clinics in stores can help to meet consumer urgent care needs.
A recent boost in dividends by 10% put Walgreens dividends at just under 3%. This is their 43rd year of consistent dividend increases. A further incentive to value investors was the decision by the Walgreens board of directors to approve a $10 billion stock buyback.
CVS Vs Walgreen’s Stock Summary
Ultimately, CVS Health is taking a big risk with its Aetna acquisition which might pay off. A concern is the amount of debt with this type of purchase.
Another concern is the changes to PBMs if Trump succeeds with changing rebates drugmakers provide to PBMs.
Walgreens Boots Alliance is enjoying consistent growth and may be the better option of the two pharmaceutical services. But it may take some time to see whether their LabCorp, Humana, and FedEx partnerships will prove lucrative.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.