drug store

Drug Stores and Pharmacy

Industry Insight

Date February 2020

Current Trends

  • For the three largest U.S. drug store retailers, the average rolling 12-month gross margin for the current year is 15.3%, representing a slight increase from 15.1% for the same period last year.
  • Industry growth is tied to elderly population levels, which are expected to increase, as approximately 10,000 Americans per day turn 65.
  • The Supreme Court will hear the third major challenge to the Affordable Care Act later in 2020, in the interim, the law remains largely intact but faces an uncertain future.


Approximate net recovery on cost


Drug store retail stable: Through 2024, U.S. pharmacy and drug stores’ revenue is expected to increase at an annualized rate of 2.7 percent to $355.6 billion, while the number of insured individuals is expected to remain relatively flat. However, the number of insured individuals could change as Americans await the fall 2020 Supreme Court hearing of the third major challenge to the Affordable Care Act. In the interim, the law remains largely intact but faces an uncertain future. Against the backdrop of the upcoming presidential election with healthcare policy at the forefront of every candidate’s platform, major U.S. drug store retailers generally fared well in 2019.

Industry leader CVS Health had a strong year in 2019, with its fourth quarter revenue increasing 22.9 percent, driven primarily by its acquisition of Aetna. The company’s comparable store sales for the year ended December 31, 2019, increased by 3.7 percent overall, and annual turnover increased 22.6 percent to 13.1 for the year over 10.7 in 2018. The company’s store count dropped by 130 stores in 2019 because of its shift to a more healthcare-oriented model with the expansion of its HealthHUB concept. CVS piloted the concept at three locations in Houston, Texas in 2019 and plans to have 1,500 HealthHUBs open nationwide by the end of 2021. The new concept differs from the company’s 1,100 MinuteClinics, which focus primarily on services including cold treatments and immunizations. The HealthHUB model will cater more to everyday needs, with a special focus on chronic disease management.

Walgreens Boots Alliance reported a slightly positive first quarter ended November 30, 2019, with Retail Pharmacy USA comparable store sales increasing 1.6 percent, but with total gross margin slipping by 1.5 points to 21.3 percent from 22.8 percent in 2018. The company’s Pharmaceutical Wholesale segment was up 8.3 percent for the period, outpacing the improvement in its retail segment. In addition to store closures that occurred in 2018 as part of its transformational cost management program, the company announced in the summer of 2019 that it would close approximately 200 of its U.S. stores. As of January 2020, the Company had completed the majority of these store closures and reported good customer retention in its ongoing locations. Additionally, management noted that the Company is rolling out a smaller store format, located primarily in urban areas, with a health and wellness focus in front-end sections. Management reported that the company had approximately 30 to 40 of the new format stores open or under construction as of late October 2019.

After its transfer of over 1,900 stores to Walgreens as part of a cash sale in 2018 and following its suspended merger with Albertsons, Rite Aid currently has over 2,400 stores still operating under the Rite Aid banner. Rite Aid’s third quarter results exceeded management’s expectations, although revenues of $5.5 billion were essentially flat versus the same period in 2018. Growth of 5.7 percent in its Pharmacy Services segment was driven by continued favorable trends in Medicare Part D membership, but was partially offset by a decrease of 1.7 percent in its Retail Pharmacy segment. Pharmacy sales were negatively impacted as a result of new generic introductions but benefited from an increase in prescription volume, resulting from the Company’s continued focus on clinical services, including immunizations.

Coronavirus disrupts Pharma supply chain: As of August 2019, 13 percent of active pharmaceutical ingredients for the U.S. market were made in China, 26 percent were made in the European Union, and 18 percent in India, according to Dr. Janet Woodcock, director of the Food and Drug Administration’s (FDA) Center for Drug Evaluation and Research. China also manufactures many medical goods, such as the protective masks, respirators, and gowns for use in hospitals and clinics. Further, as of 2018, China ranked second among countries that exported drugs and biologics to the United States and first for medical devices, according to the FDA. With escalating fears of the potential for shortages or outages of critical medicines and supplies as a result of manufacturing stoppages and slowdowns due to the spread of the coronavirus in China and Europe, consumers are turning to the FDA for updates on what to expect in the coming days and weeks. In particular, the FDA has identified approximately 20 drugs that either source 100 percent of their active pharmaceutical ingredients from China or manufacture finished pharmaceutical goods in China.

On February 25, 2020, FDA Commissioner Dr. Stephen Hahn reported that the “FDA is keenly aware that the outbreak will likely affect the medical product supply chain, including potential disruptions to suppliers [and] shortages of critical medical products in the U.S.” To the extent that the virus is not contained within a relatively short period, it is likely that drug store retailers will suffer shortages of finished goods and products made with inputs sourced from China unless they can be sourced from another location on a temporary basis.

Liquidation methodology drives value: For liquidations in the drug store segment, a going-out-of-business (GOB) sale would include a twofold approach in which the front-end inventory would be sold separately from the pharmacy (Rx) inventory. Prior to the sale of the front-end inventory, the pharmacy inventory would be sold to competitors in conjunction with the sale of the customer prescription (script) files. Appraisers typically assume that the pharmacy inventory would recover at a rate of 90 to 99 percent of cost, barring open packaging and expired or near-expiration product. It is imperative that the sale of the script files and Rx inventory occurs prior to or at the outset of the GOB sale. Running the script and Rx inventory sale after the liquidation sale has begun would lower the value of the script files, as pharmacy customers would immediately seek new pharmacies at which to purchase their medications, reducing the number of transferable prescriptions. The net impact would be a reduction in total value for the prescription list, which is typically a key component of value in drug store dispositions.

Due to the health and safety risks associated with prescription drug usage, pharmaceutical manufacturing and sales are heavily regulated by the FDA. As a result, pharmacies are vulnerable to prescription drug recalls. In an inventory appraisal, Gordon Brothers recommends monitoring the pharmaceutical products contained within a company’s inventory, because any significant recalls would have a negative impact on recovery values.

The value of script files depends on the number of active files along with the number of competitors in the area willing to purchase. As part of the liquidation process, the agent would contact local pharmacy competitors to gauge interest in the pharmacy inventory and script files. The script auction would occur with the sale of the prescription inventory, both being sold to winning bidders at negotiated prices.

In terms of an appraisal analysis, pharmacy sales are excluded from the sales capacity of the front-end liquidation model so as not to overstate the front-end merchandise sales capacity. Front-end net recovery rates typically range from 40 to 50 percent on cost, according to Gordon Brothers. It is imperative for lenders with clients in this industry to partner with an experienced appraiser to understand the value of the various drug store inventories, both front-end and pharmacy, as well as script files, to ensure that advance rates remain within realistic ranges.

Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.

Reference sources: cvs health, cnn, creditntell, ibisworld, modern healthcare, moneywise, forbes, the new york times