Rite Aid, weighed down by too much debt, has a clear opportunity to fix itself. In doing so, the drug chain can reshape the pharmacy-benefits-manager business.
The past two years have been difficult for Rite Aid. The pharmacy company pulled out of a planned merger with grocery chain Albertson’s in August, after significant shareholder opposition to the deal’s terms. Regulators had already nixed a sale of the company to rival Walgreens Boots Alliance in 2017, though Rite Aid was able to sell a large share of its stores to Walgreens.
That left the company with $3 billion in long-term debt, equal to roughly six times trailing earnings before interest, taxes, depreciation and amortization, and no deal partner to absorb it. Rite Aid’s stock is down more than 80% since the start of 2017.
It has been a difficult couple of years for Rite Aid. Photo: Richard Drew/Associated Press
But Rite Aid, which will report fiscal second quarter results Thursday morning, has a viable option to shore up the balance sheet. The company could sell its pharmacy-benefits-management unit, EnvisionRxOptions, which it acquired for about $2 billion in 2015. Analysts at RBC said in a note Monday that Rite Aid could realize up to $2.2 billion from a sale. That alone would dramatically cut debt, setting the stage for a possible turnaround.
Envision is a small player in the PBM world, but the consolidated nature of the industry should help drum up interest. Three companies process the majority of prescriptions in the United States: CVS Health , Express Scripts Holding , and UnitedHealth Group . As such, opportunities to build up scale via acquisition, without running afoul of antitrust rules, are relatively rare.
The largest players could be tempted by a chance to bulk up further. Others may jump in: The health insurer Anthem plans to launch its own PBM business, while Amazon could potentially expand its presence after acquiring online pharmacy PillPack earlier this summer.
Given that backdrop, Rite Aid has an opportunity to give its investors the rarest of surprises: some genuinely good news.
Write to Charley Grant at [email protected]