Generic Drugs Leave Rite Aid Feeling Sick


Generic drugs are good for consumers' wallets, but they aren't good for many other players in the medical industry. Pharmaceutical companies that spend billions of dollars to develop brand name drugs feel the pinch when patents run out, and generics flood the market. Apparently, so do drug stores.

Rite Aid said today that same store sales fell 2% in March from a year earlier, driven by a decline in drug sales. Sales in the pharmacy, which accounts for 67.6% of overall revenue at Rite Aid, fell 4.5%, despite prescriptions rising slightly. This means that lower cost drugs, particularly in the form of generics, have taken a bite out of sales for Rite Aid.

The small silver lining is that the rest of the store is doing quite well. Front-end same-store sales, which is everything outside of the pharmacy, rose 3.8%, helped by a boost in Easter sales.

An industry trend takes hold
This is going to be a challenge for the industry going forward, and will also impact Walgreen's and CVS . Walgreens reported a 0.7% rise in same-store sales for March, which was below expectations, showing similar trends as Rite Aid's. The company's same-store pharmacy sales fell 1.5%, not as bad as Rite Aid, but still not a strong sign for the drug business.

CVS doesn't give the same-store sales data like Rite Aid and Walgreen's but we can assume the trend of more generics and lower pharmacy sales will hold true.

Investors should be careful buying into the declining sales trends at all three companies. As health-care costs have risen, there has been pressure on all parts of the industry to cut costs, and that includes drug stores. That wouldn't be a problem if the stocks were a screaming value, but Walgreen's and CVS both have P/E ratios above 18, which is expensive considering sales trends, and Rite Aid is a risky turnaround story. That's too much for this Fool to pay to get into the drug business.

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