Reuters - A slimmed-down Rite Aid Corp (RAD.N) could lose much of its bargaining heft with insurers and makers of branded drugs at a time when it is trying to turn around its flagging pharmacy business, analysts said.
Rite Aid said on Thursday it would sell nearly half its U.S. stores to larger rival Walgreens Boots Alliance Inc (WBA.O) after the drugstore operators agreed to scrap a whole-sale merger.
Wall Street showed its displeasure at the new deal, pushing Rite Aid's shares down 30 percent to a near four-year low after the announcement. The stock added to its losses, falling 7 percent on Friday.
Rite Aid has been struggling with eroding profits in its pharmacy business, which sells prescription drugs, as increases in branded drug prices have slowed while reimbursement pressure for generics has intensified.
"I think Rite Aid is going to struggle to remain relevant in the pharmacy industry," said Adam Fein, president at Pembroke Consulting, which tracks the drug distribution industry.
"The pharmacy industry has become hyper competitive and it favors either large teams or nimble independents, and Rite Aid is buck in the middle and doesn't have geographic scale anywhere, except in the North East and the West Coast."
But it's not all bad news for the company.
Under the new deal, Rite Aid will gain access to Walgreen's centralized sourcing system, allowing it to procure generic drugs at low costs for 10 years and giving its pharmacy margins a much-needed boost.
Walgreens, the No. 1 drugstore chain in the country, has a sourcing contract with AmerisourceBergen Corp (ABC.N), the second-largest U.S. drug distributor, giving the alliance bargaining clout against drugmakers.
"We estimate more favorable generic procuring costs could provide 3-5 percent of saving on RAD's total generic spend," Cowen & Co analyst Charles Rhyee said in a research note. (ontinueReading
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