As the affordability of medical bills remains a persistent challenge for the American population, one significant player in the healthcare supply chain has been particularly impacted: pharmaceutical retailers. Despite strong performances at the outset of the COVID-19 pandemic, which contributed to record-high valuations, the industry has since experienced a prolonged decline as various structural challenges have re-emerged.

With the temporary pandemic-induced surge in sales—primarily from vaccinations and mandatory testing—diminishing over time, the resilience and sustainability of the industry’s business model are now being tested.

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

With a negative performance exceeding 70% on an equal-weight basis over a three-year period, the question arises: can the industry recover? The industry is contending with numerous headwinds, including declining reimbursement rates for prescription drugs largely due to aggressive practices by Pharmacy Benefit Managers, increased theft, shifting consumer habits, and heightened competition from major e-commerce players such as Amazon and newcomers like Cost Plus Drugs, who offer more affordable and transparent pricing models.

These pressures have led many pharmaceutical retailers to downsize operations and continually revise financial outlooks.

Consequently, market performance has been poor, with valuations declining from the unprecedented levels seen in the quarters following the pandemic to significantly lower, depressed levels. A combination of revenue cyclicality and negative operating and net income margins observed over the past few years has highlighted a marked deterioration in industry fundamentals.

Declining margins, coupled with rising leverage—evidenced by a debt-to-equity ratio exceeding 3 and limited capacity to service debt through operations—underscore the industry’s ongoing struggles and the frequent need for layoffs and restructuring initiatives.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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This divergence in financial health is further underscored by contrasting trends in free cash flow margins: while the broader healthcare sector has seen improvements, the pharmaceutical retail industry has faced a negative trend.

However, as restructuring efforts advance, cost-cutting measures take effect, and diversification of service offerings continues, there may yet be a path to renewed profitability for the industry.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA