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Walgreens Boots Alliance sees solid 3Q results

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Analysts view new deal with Rite Aid as positive for WBA

DEERFIELD, Ill. — Analysts said Walgreens Boots Alliance turned in a solid third quarter and stands to emerge on a positive note from its new deal with Rite Aid Corp. upon the termination of their merger.

For the third quarter ended May 31, WBA posted net earnings (GAAP) of $1.16 billion, or $1.07 per diluted share, compared with $1.10 billion, or $1.01 per diluted share, a year earlier. The company attributed the increases in GAAP net earnings mainly to a lower effective tax rate.

WBA topped Wall Street’s adjusted earnings forecast for the third quarter. The company reported adjusted net earnings of $1.441 billion, or $1.33 per diluted share, versus $1.29 billion, or $1.18 per diluted share, in the prior-year period. Analysts’ consensus forecast for the 2017 quarter was for adjusted EPS of $1.30.

WBA’s third-quarter sales edged up 2.1% to $30.12 billion from $29.50 billion a year ago. On a constant currency basis, the sales gain was 5%, the company said.

In the Retail Pharmacy USA division, which includes the Walgreens and Duane Reade drug chains, sales came in at $22.53 billion in the third quarter, up 6.3% from $21.19 billion a year earlier. Same-store sales rose 3.7% year over year.

Front-end sales fell 1.8% overall and 0.4% on a comparable-store basis. WBA said the dip in front-end comp-store sales reflects declines in the consumables, general merchandise and personal care categories, partially offset by growth in the health and wellness and in the beauty categories.

On the pharmacy side, sales climbed 10.9% in the quarter and accounted for 69.9% of the division’s revenue. WBA said the increase stems primarily from higher prescription volumes — including mail and central specialty pharmacy — since the formation of AllianceRx Walgreens Prime in April. The increased volume helped fuel a 5.8% uptick in comparable pharmacy sales for the quarter, despite the negative impact of new generic drugs and reimbursement pressure, partially offset by branded drug price inflation.

The Retail Pharmacy USA division filled 255.2 million prescriptions (including immunizations) adjusted to 30-day equivalents in the third quarter, a gain of 8.5% year over year. Prescriptions filled in comparable stores rose 8.3%, which WBA attributed mainly to Medicare Part D growth and volume growth from strategic pharmacy partnerships. Retail Pharmacy USA’s retail prescription market share on a 30-day adjusted basis in the quarter rose about 110 basis points to 20.5%, according to IMS Health data.

WBA said its Retail Pharmacy International division posted third-quarter sales of $2.8 billion, down 10.3% versus a year ago, mainly due to currency translation. Sales dipped 0.2% on a constant currency basis. Same-store sales inched up 0.2% year over year on constant currency terms.

The Pharmaceutical Wholesale division had third-quarter sales of $5.3 billion, down 7.9%, mostly due to currency translation, WBA said. On a constant currency basis, comparable sales rose 3.7%.

In addition, WBA raised the lower end of its fiscal 2017 adjusted EPS guidance by 8 cents per diluted share to a range of $4.98 to $5.08.

“Our results this quarter continued to meet our expectations as strategic partnerships brought more patients to our U.S. pharmacies,” WBA executive vice chairman and chief executive officer Stefano Pessina said in a statement. “This led to our highest reported quarterly retail prescription market share in the U.S. Our ongoing cost transformation program continues to bear fruit, and we remain confident in the long term growth of our company.”

Jefferies analyst Brian Tanquilut noted that pharmacy was the catalyst in a positive quarter for WBA.

“The company beat adjusted EPS expectations in third-quarter 2017 ($1.33 versus $1.30), as improving pharmacy fundamentals from the transition of the Prime [Therapeutics] and TRICARE contracts more than offset a slight decrease in front-end same-store sales,” he wrote in a research note. “Total same-store sales results in third-quarter 2017 beat Street expectations (3.7% versus 2.4%), largely as a result of continued strong pharmacy same-store sales, driven by continued transition of the Prime and TRICARE volumes. Same-store script growth was at record levels for the second consecutive quarter. These strong same-store results were more than enough to offset a slight decline in front-end same-store sales, which was in line with our expectations. We believe the front-end same-store sales in third-quarter 2017 should be enough to lessen fears around the potential Whole Foods Market-Amazon impact, at least over the short term.”

WBA’s new agreement with Rite Aid should provide a lift for its share price, which had been weighed down amid the lengthy antitrust review by the Federal Trade Commission, according to Tanquilut.

“The new WBA-Rite Aid agreement should be a clearing event for WBA, as it’s likely to get FTC approval and WBA is able to maintain a portion of the original estimated synergies,” he stated, adding, “We expect the FTC to approve this new agreement, as we believe WBA wouldn’t have entered into it if the FTC wasn’t fully aware and on board with the revised transaction.”

Under the new deal, WBA plans to buy 2,186 stores, three distribution centers and related assets from Rite Aid for $5.175 billion in cash, the assumption of related real estate leases and an option for Rite Aid join the Walgreens Boots Alliance Development GmbH group purchasing organization for pharmaceuticals. The transaction is expected to be completed in the next six months, pending FTC approval and other closing conditions. Just before announcing the new pact with Rite Aid, WBA authorized a stock buyback program for up to $5 billion of the company’s shares, which Tanquilut called “an added bonus that should lift [WBA] shares back to levels seen pre-Rite Aid decision volatility.”

Fitch Ratings viewed the new agreement with Rite Aid as a “strategic positive” for WBA, which it said is the second-largest play in the U.S. arena with a 20% prescription market share.

“WBA’s proposed acquisition of 2,186 Rite Aid locations would yield increased geographic coverage, particularly in certain Northeastern markets of the U.S., improving its ability to compete for inclusion in narrow and preferred pharmacy networks. At the end of fiscal 2016, 76% of the U.S. population lived within a five-mile radius of a Walgreens or Duane Reade, and Fitch anticipates the coverage is likely to rise modestly following the Rite Aid stores acquisition,” the credit rating firm observed. “Fitch anticipates WBA can grow its U.S. pharmaceuticals sales at around 4% annually, by taking share in non-specialty categories while maintaining or losing modest share in the specialty category.”

Still, Wolfe Research analyst Scott Mushkin said a number of key questions remain for the revamped WBA-Rite Aid deal, which he doesn’t see as a slam-dunk for FTC clearance.

“We struggle to see how a Rite Aid ‘light’ merger will be any more palatable to the FTC than the original transaction, as many of the East Coast markets WBA wants to purchase have clear market-share concentration issues,” Mushkin wrote in a research note.

He said Wolfe Research’s issues with WBA’s planned acquisition of Rite Aid Corp. haven’t changed under the new agreement: significant market concentration, a unilateral reduction in competition, fewer choices for payors and consumers, and the possibility for “a significant transfer of wealth” from pharmaceutical manufacturers to WBA-Rite Aid.

“All these factors, we believe, remain in place with the slimmed-down version,” Mushkin said in his report. “As such, we would anticipate that the company would at a minimum need to divest a number of stores in certain markets, and there remains a strong possibility that the FTC could move to block the new proposal altogether.”


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