Will Foreign Pharmacies Impact Drug Sales at U.S. Stores?

U.S.-based pharmacies are scrambling to deal with a new law in the state of Maine that could lead to greater changes in how drugs are purchased in the America. Maine recently ruled that state residents and businesses can use select foreign mail-order pharmacies for their prescription needs. The practice of buying drugs from Canada is not new, especially for Americans living near the border. And Maine's blessing on the practice is an important development in the issue of high U.S. prescription drug costs. If the law is deemed a success and results in drug cost savings for Maine residents, it could lead to other states adopting similar legislation. Drug importation could become the norm for many Americans.

Drugs from U.S. pharmacies vs. foreign pharmacies
American pharmacists and an industry trade group want drug importation to be declared illegal due to potential safety issues. Drug importation and foreign pharmacies are commonly associated with counterfeit drugs. But many online pharmacies are legitimate businesses with good and verifiable credentials. U.S pharmacies should be concerned about the potential loss of business that can result from the use of their online competitors. The Wall Street Journal reported a cost comparison for a Portland, Maine, city employee of a 90-day supply of the heartburn medication Nexium obtained through their health insurer Aetna versus CanaRx. CanaRx is a Canadian pharmacy broker that sells prescription drugs from a variety of foreign pharmacies. By using CanaRx, the total cost savings on the medication came out to more than $400, and the employee had no out-of-pocket expense.

Despite the protests and legal actions taken by the pharmaceutical and retail pharmacy industries, Maine officials are confident that medications obtained from these pharmacies are legitimate and safe. The passage of the law is meant to give consumers more prescription drug purchasing options. For U.S.-based pharmacies, this means an increase in the amount of competition in the market of prescription drugs.

Rite Aid fights for state licensing of pharmacies
Rite Aid   (NYSE: RAD  ) is opposing the removal of state licensing requirements in Maine for accredited Canadian pharmacies, which allows them to do business with U.S. consumers. The change also applies to other foreign pharmacies located in the U.K., New Zealand, and Australia. For Rite Aid, prescription drug sales accounted for 67.9% of total drugstore sales for the latest second quarter. New generic drugs negatively affected pharmacy sales by 249 basis points during the second quarter of fiscal 2013.

The number of prescriptions filled in same stores was flat compared to the same period last year. New generic drugs did drive an improvement in adjusted EBITDA to $341.6 million, or 5.4% of revenues for the second quarter. An improvement over last year's second quarter adjusted EBITDA of $218.7 million, or 3.5% of revenues. Overall, the company turned a profit during the quarter and posted diluted EPS of $0.03 versus a net loss of $0.05 per diluted share earned in the same period in the prior fiscal year.

CVS focusing on generic drug alternatives
CVS Caremark's (NYSE: CVS  ) pharmacy business gained 2 percentage points of market share between fiscal 2011 and 2012, to more than 21%. The company also had a 9.1% growth in prescriptions dispensed in 2012, leading the industry. The company moves its customers to lower-cost, generic drug alternatives whenever possible and clinically appropriate. In fact, generics provide CVS with better profits than brand-name drugs.

In the second quarter of fiscal 2013, new generic drugs provided CVS with significant earnings growth and margin expansion. CVS is confident of the opportunities available from generic drugs and expects these to continue for the next few years. This is one area where U.S. pharmacies have a competitive advantage. While foreign pharmacies have lower prices on brand-name drugs, their prices on generic medications are comparable to those in the U.S. Despite their positive effect on earnings, a negative impact of about 670 points on CVS's pharmacy same store sales was attributed to generic introductions.

Walgreen expanding business through partnerships
In comparison, Walgreen's  (NYSE: WAG  ) retail pharmacy market share for fiscal 2013 grew to 19.1%, an increase of 0.4% over last year. The company expanded its pharmacy services during the year and established long-term reimbursement rates with commercial pharmacy payers that brings "greater stability and certainty" to the pharmacy side of the business. Walgreen also participates as a preferred pharmacy to three of the top Medicare D plans, giving it greater access to a growing number of customers using Medicare drug benefits.

Prescription drug sales, which increased 6.1%, accounted for 63.9% of fourth quarter sales ended Aug. 31. Fourth-quarter prescription sales went up 6.4% and volume increased 8.2% over the same period last year. Prescriptions filled in comparable stores rose 7.1% during the quarter.

My Foolish conclusion
If foreign pharmacies gain wider acceptance in the U.S. from consumers seeking less expensive drugs, long-term pharmacy sales at U.S based drug stores could be negatively affected. These drugstores may need to rethink their prescription drug offerings by focusing more on generic drugs, where there's a greater competitive advantage. Similarly, pharmacies, like CVS and Walgreen, may turn their focus more to health and wellness services, like in-store clinics and flu vaccinations. This ongoing issue is one worth watching for investors and consumers alike.

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