Dismembered by Walgreens Boots Alliance Inc (NYSE:WBA) and awaiting the swoop of Amazon.com, Inc. (NASDAQ:AMZN), Rite Aid Corporation (NYSE:RAD) is dead in the water. I wrote last month that Amazon is Godot in the Rite Aid play, and Godot never showed up. Instead, Amazon seems satisfied to see RAD stock die.
While buying Rite Aid would give Amazon a collection of assets including a pharmacy benefit manager (PBM) and over 2,000 retail outlets that could expand its physical presence beyond Whole Foods, Amazon doesn’t have to buy Rite Aid to get into the pharmaceutical market. It already has many of the licenses it needs.
If Amazon stays offstage, Rite Aid has no good options. Despite the optimism of people like our own Luke Lango, the RAD stock price continues to fall, down another 18% since my last story came out.
New Industry Direction
The Walgreens purchase will close early in 2018, with 1,932 stores, three distribution centers and related inventory going its way. Almost one third of the stores will close, where they compete with Walgreens outlets, and Rite Aid will be left with 2,600 stores and EnvisionRX, the PBM it purchased a few years ago for $2 billion. That’s more than all of Rite Aid is worth now.
Since the Walgreens deal hasn’t closed, retail investors aren’t seeing the hope that Luke pointed to in his column, which was $4.3 billion of cash that will cut Rite Aid’s debt by more than half from the $7.1 billion it reported in early September. Investors can’t accurately calculate the asset base that debt is being placed against, either.
Rite Aid simply lacks the size to compete against Walgreens, CVS Health Corp (NYSE:CVS) and Amazon, says James Brumley. (He could have added Wal-Mart Stores Inc (NYSE:WMT), the country’s largest retailer, to the list.) Vince Martin is also convinced that a Rite Aid comeback is not going to happen.
Envision was supposed to be the savior for Rite Aid. But that part of the business is now damaged, with one short seller comparing independent PBMs to an organized crime racket. More importantly, the purchase of Catamaran, a rival PBM, by UnitedHealth Group Inc (NYSE:UNH) has upended the industry, taking the largest insurer out of the PBM market.
The biggest loophole in the Affordable Care Act of 2010 was that it did nothing to control drug prices. Drug companies and PBMs ran through that loophole, but the game had to end, and it seems that the insurance industry is ending it, through vertical integration.
It’s still possible that one of UnitedHealth’s rivals, like Cigna Corporation (NYSE:CI), Anthem Inc (NYSE:ANTM) or Humana Inc (NYSE:HUM), might want Envision, but since CVS Health moved toward buying Aetna Inc (NYSE:AET), the future looks clear. Insurers are going to be controlling costs by controlling the suppliers of goods and services. The need for a third party in this is not obvious.
The Bottom Line on RAD Stock
The only people who should be buying RAD stock at this point are speculators, as Will Healy wrote. Maybe Rite Aid can be repackaged by private equity. Perhaps an insurer will buy Envision for a profit. Maybe Amazon will still swoop in for the licenses and the physical presence. Or maybe there’s a genius entrepreneur out there with a great plan for Rite Aid’s future.
When I was a boy, my late mother used to tell me, “If ifs and buts were candies and nuts, we’d all have a Merry Christmas.” She also liked to say that “If wishes were horses, beggars would ride.”
When it comes to the RAD stock price, aphorisms are all we are left with.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
