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Rite Aid drug sales: The profit in generics

Audrey Quinn Dec 19, 2013
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Rite Aid comes out with its earning report today, and it should hold good news for investors. The pharmacy giant was in the red the previous five years in a row. But in 2013, Rite Aid’s value has tripled.

Brian Nichols is a value investor. He sniffs out cheap stocks that are about to go up. And this past year, his number one value stock pick was Rite Aid.  The company revamped its image, and started new customer loyalty programs, but Nichols says, “the bigger story with Rite Aid is the rate at which new generics are being introduced to the market.”

When a generic drug comes out, it’s usually so much cheaper than the brand name. Pharmacies can get away with selling it at a much bigger markup, because consumers will still feel like they’re getting a deal. 

Between 2011 and 2016, $133 billion dollars worth of brand drugs are going generic. That’s a lot more drugs that pharmacies can milk for that big margin.

“It’s a massive shift for the industry itself,” Nichols says, “and right now I think that that’s what driving profits and that’s why the stock itself and Walgreens, CVS, have all soared to such a degree.”  

But not all pharmacies are going with these big mark-ups.  

Lisa Gill covers prescription drugs for Consumer Reports. Her team sent secret shoppers to check out generic drug prices at different stores.

What we found was shocking,” Gill says. “In fact, it was the largest variations we had ever seen in this kind of drug pricing study.”

She found big pharmacies can charge two to five times as much for drugs as elsewhere. Rite Aid itself has some of the most expensive generic drugs out there. It’s second only to CVS. But smaller pharmacies and Costco are keeping generics cheaper. So, she says, it’s smart to shop around.

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