Opportunities for pronounced gains in market share by the top chain drug retailers are few, but several catalysts stand to propel pharmacy business, according to industry observers.


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The Top 10 Chain Drug Retailers

April 25th, 2012

NEW YORK – Opportunities for pronounced gains in market share by the top chain drug retailers are few, but several catalysts stand to propel pharmacy business, according to industry observers.

“Over the past five years the market share of each pharmacy category has been relatively stable, with modest growth in the share of mass merchants (mainly Walmart) and mail order, each at the expense of independents and supermarkets,” Fitch Ratings stated in its “Navigating the Drug Channel” report.

The biggest operators of retail pharmacies — Walgreen Co., CVS Caremark Corp. and Rite Aid Corp. — together account for around 40% of all dispensed prescription drugs in the United States, according to Fitch. Walmart is a close fourth, with an estimated scripts dispensed share of 6.5% to 7%.

TOP 10 DRUG CHAINS BY DOLLAR VOLUME
1. Walgreens — $72.18 billion
2. CVS Caremark — $59.60 billion (retail sales only)
3. Rite Aid — $26.12 billion
4. Shoppers Drug Mart — $10.53 billion**
5. Katz Group — $8.70 billion***
6. Health Mart — $7.36 billion*
7. Jean Coutu Group — $3.81 billion**
8. London Drugs — $2.23 billion***
9. Medicine Shoppe — $1.90 billion*
10. Uniprix — $1.84 billion***
Source: Racher Press research.
*Estimate.
**Converted from Canadian dollars.
**Estimate. Converted from Canadian dollars.

“Market share gains are critical to offset continued pricing pressure from constrained reimbursement growth in the near to intermediate term” the report said. “However, Fitch believes that further large-scale acquisition opportunities are limited.

“Many of the top 20 retail pharmacies — besides the top three chains — are part of integrated offerings at mass merchants and supermarkets. Therefore, share gains will be driven by above-average organic growth, store closings or share losses by weaker chains and independents, and by small market fill-in acquisitions and prescription file buys.”

By dollar volume, the top 10 largest drug chains in 2011 remained unchanged from the previous year: Walgreens ($72.18 billion in total sales), CVS Caremark ($59.60 billion, retail sales only), Rite Aid ($26.12 billion), Shoppers Drug Mart ($10.53 billion, converted from Canadian dollars), Katz Group ($8.70 billion, converted from Canadian dollars), Health Mart ($7.35 billion), Jean Coutu Group ($3.81 billion, converted from Canadian dollars), London Drugs ($2.23 billion, converted from Canadian dollars), Medicine Shoppe International ($1.90 billion) and Uniprix ($1.84 billion, converted from Canadian dollars).

By store count, Walgreens (7,840), CVS Caremark (7,357), Rite Aid (4,659) and Health Mart (2,937) remain the top four chains. But Katz Group's sale of its Drug Trading Co. and Medicine Shoppe Canada businesses to McKesson — involving over 1,000 stores — has changed the field.

TOP 10 DRUG CHAINS BY STORE COUNT
1. Walgreens — 7,840
2. CVS Caremark — 7,357
3. Rite Aid — 4,659
4. Health Mart — 2,937
5. Shoppers Drug Mart — 1,257
6. Medicine Shoppe International — 847*
7. McKesson Canada — 626**
8. Pharmasave — 448
9. Katz Group — 420
10. Jean Coutu Group — 399
*Includes international stores.
**Does not reflect acquisition of 1,010 Drug Trading and Medicine Shoppe Canada stores.

Shoppers Drug Mart (1,257) moves up one spot to No. 5, followed by Medicine Shoppe International at No. 6 (847 stores, up one spot from last year), McKesson Canada at No. 7 (626, up one spot), Pharmasave at No. 8 (448, up one spot), Katz Group at No. 9 (420, down four spots) and Jean Coutu Group at No. 10 (399, up one spot). Uniprix, with 387 stores, dropped to No. 11 from tenth place last year.

Analysts point to three areas on the pharmacy side of the chain drug business that will be key growth drivers in 2012.

The first is generic drugs. As the year progresses, more branded medications will lose patent protection and more generic competitors will hit the market, analysts say.

Drug chains should begin to get a lift from the generics wave at the end of the second quarter and then should see it accelerate through the end of the year, according Joseph Agnese of Standard & Poor’s Equity Research.

“There will be big top-line hits from the generic wave, but the cost will come down even more," Agnese explained recently. "So overall there’s a net positive because of the margin expansion that will occur.”

About $13.5 billion worth of branded drugs went off patent in 2011, but that figure stands to jump this year to between $24 billion and $28 billion, Citi Investment Research’s Deborah Weinswig wrote in her “2012 Food & Drug Retailer Outlook.”

“In 2012, we expect generics to be a headwind for same-store sales and a tailwind for gross margin, which should result in a positive impact to the drug retailers’ overall profitability,” Weinswig said. “The maximum profitability will come after the 180-day exclusivity period for a branded drug’s patent expires, as the first 180 days typically allow only one or two generic manufacturers to offer the drug.”

Specialty drugs, meanwhile, are an emerging opportunity. That market’s rapid growth has drug chains working on solutions to help patients handle the high price tags and complex regimens for those ­medications.

“We believe drug retailers are focusing their attention on their specialty business, as they search for ways to reduce specialty drug costs,” Weinswig stated.

Another boost could come from retail health clinics. Analysts say the clinics’ business model is taking shape, the list of services is growing, and these outlets can address the nation’s shortage of primary care doctors as well as the 30 million new patients expected to have health insurance coverage under health care reform.

“We see in-store health clinic offerings helping drive store traffic and prescription and front-end sales as services are expanded,” Agnese wrote in a drug retail research note.

Retail clinics “are at an inflection point,” Weinswig noted. “As the drug retailers figure out the economics of the retail clinic, we expect them to continue to ramp up openings as they race to provide a more complete health services offering.”

She added that studies have shown that about 70% of retail clinic patients become new pharmacy customers and that 80% make a general merchandise purchase and 38% buy an over-the-counter item during their visit.

*To see the lists of the top 50 drug chains by sales and by stores, see the State of the Industry 2012 report — which includes economic analysis, drug chain profiles, interviews with chain drug leaders, and industry trend articles — in the April 23, 2012, print issue of Chain Drug Review.

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