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Can Walgreens and CVS Health resist the online invasion of pharmacy sector?

A research report that came out recently predicted that the online pharmacy market is set to grow to $85 billion in the next five years, which represents a double-digit compound annual growth rate. The latest developments in the drug retail space and the race among companies to strengthen their foothold in the online market validate the estimate.

The confidence of the traditional players has been shaken by the increasing presence of Amazon (AMZN) and Walmart (WMT) in healthcare retail through buyouts and partnerships. Currently, the need to adopt a technology-driven business model is driving companies to think beyond brick-and-mortar stores even as the demand for pharmacy products continues to grow and customers look for more convenient ways to access healthcare.

Related: What’s in store for pharma stocks this year

The Leaders

Despite their long-drawn-out rivalry, Walgreens Boots Alliance (WBA) and CVS Health (CVS) find common ground when it comes to resisting the onslaught on drugstore chain operators by online pharma retailers.

The confidence of traditional players has been shaken by the increasing presence of Amazon and Walmart in healthcare retail

To put it simply, drugstore chains cannot survive depending solely on their retail outlets anymore, however advanced they are, but have to adapt to the changed scenario. To address the issue and retain store footfall, CVS has embarked on a drive to lure consumers to the outlets. The HealthHUBs being set up by the company in its stores will educate patients on dealing with serious health issues and organize community events to facilitate direct interaction between patients and healthcare providers. The pilot program launched in Houston was well received by customers.

Similarly, Walgreens introduced what it calls ‘Feel More Like You,’ a special program to help cancer patients. By offering personalized services that cannot be availed online, such programs give the companies an edge over their e-commerce counterparts. The services, which most customers find useful, could save the traditional drugstore culture from becoming extinct.

Walgreens Boots Q2 earnings down 5%

The Digital Push

While offering customers renewed store experience through such initiatives, the companies also make aggressive efforts to digitize their operations, gaining the mileage required to effectively counter the threat from the likes of Amazon.

Earlier this year, Walgreens revealed plans to invest about $300 million in digital healthcare, a few months after signing a partnership with Microsoft (MSFT) for shifting its digital infrastructure to the IT giant’s cloud platform. The program includes joint research to develop healthcare solutions.

Major M&A's in healthcare sector

The digital push is an apparent move to take on the CVS, which last year enhanced its portfolio by acquiring health insurance major Aetna in a mega-deal. The company had reported dismal results for the most recent quarter, which the management referred to as the most difficult quarter in the company’s history.

Also see: CVS Health Q1 2019 Earnings Conference Call Transcript

Financials

Walgreen’s earnings dropped 5% to $1.64 per share in the second quarter when revenue growth fell short of expectations, hurt by lower sales both at the retail and wholesale pharmacy segments. The outcome prompted the management to forecast flat earnings for fiscal 2019.

In contrast, CVS registered a 9% increase in earnings to $1.62 per share for the latest, on the back of a 35% revenue growth amid strong demand for pharmacy services and retail products. 

Stock Performance

Walgreens’ stock entered a downward spiral towards the end of last year and is maintaining the trend. It lost about 21% so far this year. The strong prospects for a recovery from the current lows in the near future make the stock an attractive investment option.

Interestingly, CVS is following a pattern similar to that of Walgreens with regard to the stock movement. Currently hovering near the multi-year lows seen last month, the stock seems to have bottomed out. It has lost 16% so far this year and 24% in the past twelve months.

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