Walgreens monthly sales growth will be challenging
The rate at which branded drugs get replaced by generic alternatives is expected to continue at close to 2012 levels in the near term.
- Walgreens monthly sales declined again in February after a turnaround in January.
- Prescription sales account for about two-thirds of Walgreen's total sales.
- Growth in prescriptions filled monthly will decelerate as substantial time has elapsed since the new agreement with Express Scripts.
- More branded drugs are expected to be replaced by generics in 2013, which will mitigate benefits arising from filling more prescriptions.
- We expect monthly pharmacy sales to be under pressure in the near term, as the negative impact of generics will outweigh the benefits of more prescriptions.
The largest drugstore chain in the U.S., Walgreen's (WAG) stock has see-sawed over the past three months. After turning around a year-long decline in sales in January, the company reported a marginal sales decline in February. The decline was a result of an extra day in February, since 2012 was a leap year.
Excluding that extra day, 2013 February sales increased 1.5%. The growth was substantially lower than the almost 6.5% growth in January, and surprising -- because the company continued to regain Express Scripts prescriptions lost to competitors in the first half of last year. Prescriptions filled at comparable stores grew by 6.5% in February, including a negligible positive impact from the flu season. The disappointing results led to the company's share price fluctuating by almost 4% on Tuesday, before recovering to $41.
Almost two-thirds of Walgreen's total sales are through the pharmacy. Let's take a look at the factors contributing to the mixed performance from the segment, and how they can impact monthly sales in the near future.
Growth in prescriptions filled set to decelerate
Walgreen filled about 90 million Express Scripts prescriptions in 2011. The disagreement on pricing terms resulted in the two companies ending their arrangement in the beginning of 2012, and is estimated to have cost Walgreen $5.3 billion in annual sales. Customers were forced to switch to another pharmacy or pay more for drugs if they continued to use Walgreens.
The dispute took a grimmer turn when Express Scripts acquired another pharmacy benefit manager, Medco, last April -- further costing Walgreen millions of prescriptions. In July, the two companies reached an agreement which allowed Express Scripts customers to return to Walgreen starting September 15, 2012. Since then, Walgreen has successfully turned around the decline in prescriptions filled and reported growth in prescriptions filled of about 14% and 6.5% in January and February, respectively.
As considerable time has elapsed since the new arrangement came into force, we expect the growth to decelerate in the coming months. We also expect competitors such as CVS Caremark (CVS) and Rite Aid (RAD) to retain the substantial number of Express Scripts customers they gained during the dispute. The return of Express Scripts prescriptions leads us to believe the company's share in the prescriptions filled annually in the U.S. will increase from 18.5% in 2012 to 19% by the end of 2013.
Generics to mitigate the benefits arising from an increase in prescriptions filled
An estimated $260 billion of prescription drugs sales are scheduled to lose their patents between now and 2018. In all, blockbusters with a combined $170 billion in annual sales will lose patent between 2012 and 2015. In 2012, an estimated $35 billion of prescription drug sales were exposed to generic competition. Hence, the rate at which branded drugs get replaced by generic alternatives is expected to continue at near 2012 levels in the near term.
Our estimate is in line with the pharmacy sales performance in January and February. Comparable store pharmacy sales increased by 6% in January and were flat in February. Both of these growth rates were below the number of prescriptions filled during the corresponding months. The comparable store pharmacy sales were negatively impacted by 6 percentage points in both the months, due to generic drug introductions in the last 12 months.
As a result, we expect the sales from the pharmacy segment to stay under pressure in the coming months. The number of prescriptions filled by the company should keep increasing at a slower pace as more Express Scripts customers return. Simultaneously, the introduction of more generics will mitigate the positive impact of a growth in prescriptions.
We expect the impact of generic introductions to outweigh benefits from new prescriptions. As pharmacy sales account for about two-thirds of Walgreens' total sales, its sales in the March-May quarter are also expected to be under pressure.
We have a $38 Trefis price estimate for Walgreen, which is 10% below the market price.
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