drug store

Drug Retailers

Industry Insight

Date February 2019

Projected Values - Drug Stores and Pharmacy

Current Trends

  • Gains in health insurance coverage made since the passage of the Affordable Care Act  in 2010 are beginning to reverse; the uninsured rate among working-age people (between 19 and 64) was at 15.5% in mid-2018, up from 12.7% in 2016, meaning an estimated 4 million people lost coverage
  • For the three largest drug store retailers, the average gross margin in 2018 was 20.2%, representing a decrease from 20.7% in 2017, driven by a 1.4 point decrease for Walgreens
  • The CVS/Aetna merger looks to challenge industry norms for pricing and supply management


Approximate net recovery on cost


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 sales 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 file/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 U.S. Food and Drug Administration (FDA).  As a result, pharmacies are vulnerable to prescription drug recalls.  For the purposes of an inventory appraisal, Gordon Brothers assumes all pharmaceutical products contained within a company’s pharmacy inventory are not subject to FDA recalls.  Gordon Brothers recommends monitoring the pharmaceutical inventory and treatment of recalled products as any recalls of a significant quantity of products within the pharmacy inventory would have a negative impact on recovery values.

The value of script files is dependent upon the number of active files in conjunction 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 in conjunction with the script files.  The script auction would occur concurrently with the sale of the prescription inventory, both being sold to winning bidders at negotiated prices.  In terms of the 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.  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.

CVS/Aetna merger implications: CVS’ Aetna merger deal closed in late November 2018. The nearly 70 billion dollar merger is expected to significantly impact consumer healthcare. The deal combines the United States’ largest pharmacy chain, one of its largest pharmacy benefit managers, and its third largest health insurer. Now that the deal has closed, plans to move forward on combining the entities move ahead. CVS plans to open its first concept stores in the coming months. Under the new plan, Aetna will operate as a stand-alone business unit led by members of the current management team. The company’s first step will be to focus on reducing medical costs. Specific programs that are targeted to better manage chronic disease will be piloted at the concept stores to understand which are the most effective. Additionally, the concept stores will provide enhanced health services, on-site counseling, expansion of the MinuteClinic, and the introduction of digital health apps and connected devices.

CVS’s major competitors have attempted to keep up with mergers and expansions; however, none have engaged in deals as large and impactful. Walgreens recently paired with grocery superstore Kroger’s; going forward, 13 of its stores will offer mini Kroger’s grocery outlets inside the stores. The idea arose from the growing popularity of one-stop-shop supercenters like Target and Walmart, which offer pharmacies, extensive grocery sections, and a wide range of hard and soft goods. In another expansion, Walgreens recently acquired 185 Fred’s Pharmacies and launched a partnership with online cosmetics company Birchbox to offer exclusive in-store beauty sections. On a less positive note, competitor Rite Aid’s attempted merger with grocer Albertson’s broke off in early August 2018. This was the second prospective industry acquisition to fall through last year, after Walgreens/Boots Alliance’s plan to buy Rite Aid was also terminated. Rite Aid struggled to compete against Walgreens and CVS in 2017, but generated slightly positive comps in 2018, signaling a potential turnaround.

Increase in generics: According to data from EvaluatePharma, approximately $215 billion in brand-name pharmaceutical sales will be exposed to generic competition from 2015 through 2020. However, this loss of patent exclusivity is trending at a lower rate from 2010 through 2015, meaning fewer new drugs will enter the market through 2020 than the prior five-year period. Nevertheless, lower-cost generic equivalents will continue to enter the market, benefiting the industry, as their lower cost enables more consumers to comply with their medication dosage and refills. Despite this influx, some revenue constriction will occur as consolidation among generic manufacturers will lower price-based competition among generic drug makers, causing the industry’s generic acquisition cost, or the price of purchasing generic drugs from manufacturers, to increase.

According to IMS Health’s 2017 Medicines Use and Spending in the U.S. report, the number of prescriptions dispensed by chain stores increased 18.5 percent from 2012 to 2016 (latest data available), and 89.0 percent of prescriptions dispensed in the United States in 2016 were generic. Comparatively, independent retail channels dispensed fewer prescriptions, while food and big-box stores, such as Walmart, captured a larger share of the prescription market, contributing to the drop in revenue for 2017 (-2.8 percent).

Typically, prescription prices are approximately 10.0 percent higher at drug stores than at traditional grocers, based on information sourced from IBISWorld. To mitigate this trend and increase front-end sales, many pharmacies and drug stores offer discount rewards programs, including CVS’s ExtraCare loyalty card program. Through 2022, industry revenue is expected to increase at an annualized rate of 4.6 percent to over $338 billion. This anticipated accelerated growth will be driven by retailers expanding their stores’ range of services to include preventive care options and additional front-end offerings.