The Patient Protection and Affordable Care Act (the Act) will positively impact sales in the retail pharmacy sector. The reason is pretty simple: Obamacare will bring more people into the health care sector. Moreover, the health care reform measure includes a prescription drug benefit.
Prescription drugs are considered an essential health benefit under Section 1302 of the Act. In short, there are different tiers of coverage for the types and sources of medications. Generic drugs will become even more affordable for consumers because of lower out-of-pocket expenses.
The retail pharmacies have a big hand in dispensing generic prescriptions, so the Affordable Care Act will be a boon for this sector.
CVS Caremark is all about generics
CVS Caremark (NYSE:CVS) is a sector leader with respect to prescription revenue and market capitalization, and the company recently reported very solid second quarter results. In the three month period ending on June 30, the pharmacy retailer's profits were up by $231 million, or 4.8% compared to the same period in 2012.
CVS' earnings growth is due mostly to rising revenues built on the continued demand for new generic drugs. The company's second quarter 10-Q notes that the rise in profits was largely the result of "an increased generic dispensing rate." Moreover, generics were a booster shot for CVS's margins. This is a reflection of an increase in gross profit as a percentage of revenues – 31% compared to 30.9% for the second quarter of 2012.
Currently CVS' share price hovers at $58 per share, with a price to earnings ratio just shy of the S&P 500 ratio of 17.7. The company has performed well for the last 6 quarters, and the outfit also anticipates the trend of new generic introductions to continue. In the long run CVS' share price will continue to rise as the Affordable Care Act brings more generic drug consumers into the retail pharmacy sector.
CVS' generic drug market rivals
Walgreen (NASDAQ:WBA) operates the largest network of retail drugstores in the United States while offering an array of consumer goods and services, pharmacy, and health and wellness services.
The drug chain is strong in a number of areas. Walgreen has climbing net income, steady cash flows, and a sound overall financial position. Moreover, Walgreen has a history of solid share price performance and continued growth in earnings per share.
In its most recent quarterly report the company announced that sales were up by about 3.8%, to just under $6 billion. Walgreen's pharmacy sales accounted for much of this rise, providing more than 64% of total sales.
In short, Walgreen's prescription drug sales have been rising in 2013 and are likely to continue as Obamacare kicks in. Another way the retail pharmacy will capitalize on the Act is through the expansion of its "Take Care" retail clinic's services. Walgreen intends to add treatments for asthma, diabetes and high cholesterol to the services provided at these clinics.
While CVS is also expanding its retail clinics' services, Walgreen's clinics are said to be more comprehensive. Ultimately, some analysts believe that Obamacare will cause a physician shortage in primary care and this will ramp up demand for clinical services provided by the retail pharmacies.
Express Scripts (NASDAQ:ESRX) is a leading pharmacy benefit manager (PBM) and operates as a third-party administrator of employee drug plans. Moreover, almost 100 million members receive their prescriptions from an Express Scripts managed plan.
This makes the prescription provider the largest PBM. Express Scripts also has a large share of the Medicare prescription market. The outfit's business model is designed to cut the out-of-pocket cost of prescription drugs for its members – this ultimately creates solid margins.
For the second quarter ending on June 30, Express Scripts reported an increase in gross profit by $75.8 million, or 3.8% compared to the same period in 2012. Management said that these were the results of better management of ingredient costs and cost savings from the increase in the generic fill rate.
Generics are the bottom line
CVS, Walgreen and Express Scripts have performed well in 2013 mostly because of the expansion of generic drug sales. While the Affordable Care Act faces delays and difficulties as it is rolled out, the retail pharmacy sector is a good place for investors with a long-term view. The Act will bring more people into the health care sector, and these consumers will have better access to generic medications provided by these sector leaders. In other words, Obamacare is good medicine for the retail pharmacy sector, which is a spoonful of sugar for consumers and investors alike.
Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.