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Pharmaceutical Retailers Underperformed Broader Markets

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Reimbursement pressure 

Shares of pharmaceutical retailers including CVS Health (CVS) and Walgreens Boots Alliance (WBA) underperformed the benchmark index in the first quarter. Higher reimbursement pressure, deflation in generics, and low brand inflation could hurt the companies’ bottom lines.

CVS and Walgreens stocks fell 17.7% and 7.4%, respectively, in the first quarter, which reflected the weak earnings outlook and challenging market conditions in the United States and the United Kingdom. On a YTD (year-to-date) basis as of April 4, Walgreens and CVS stocks have fallen 20.8% and 18.5%, respectively.

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Outlook

Both companies’ bottom lines are expected to take a hit from higher reimbursement pressure and deflation in generics. Persisting challenges are expected to hurt the financials and stock prices.

We expect CVS Health’s earnings to decline in fiscal 2019. However, the company’s bottom line is expected to return to the growth trajectory in fiscal 2020 and mark mid to high-single-digit growth. The top line is expected to grow at a high double-digit rate due to the addition of Aetna. CVS stock trades a low valuation multiple, which could push its shares higher in the coming quarters.

Walgreens’ top and bottom line are expected to remain pressured in the near term, which reflects challenges in the retail pharmacy segment in the United States and the United Kingdom. Profitability is expected to take hit due to increased reimbursements. However, Walgreens stock is also trading cheap, which makes it an attractive bet. The company’s management expects the pressure from reimbursements to subside in the coming quarters, which could drive its earnings.

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