Generic drug sales could be a boon for both CVS Caremark Corporation (CVS) and Walgreen Co. (WAG), according to John Schnieders, a principal at Schnieders Capital Management. Schnieders said America’s aging population will usher in an era of increased prescription drug sales.
“The National Association of Pharmacists has done a study that the average 55-year-old American gets about five prescriptions filled a year and by the time you reach 75, that number goes up to 29 prescriptions filled a year,” Schnieders said. “So we have the largest demographic in American history retiring. We know they are going to need to get their drugs filled and most likely they’re going to do it at CVS or Walgreen.”
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What’s more, Schnieders said generic drugs, which are increasingly popular, are actually more profitable for pharmacies like Walgreen’s and CVS.
“If you fill a vial of drugs for $100, CVS and Walgreen might make $1 just to fill that order for you. But if you buy a generic drug that is chemically equivalent and it only cost $25, they might charge $5 to fill that vial,” Schnieders said. “So their profit margins are much higher, but the customer is still saving 70% on the overall cost. So there’s tremendous earnings expansion that can take place in both of these companies.”
Additionally, Schnieders expects CVS and Walgreen’s to profit from Obamacare. He said an estimated 30 million people will now have health insurance, but there is no expected increase in doctors or hospitals to treat those patients, creating an opportunity for CVS and Walgreen’s.
“To meet this need, CVS has come out with their MinuteClinic and Walgreen has come out with their Healthcare Clinic. Both of these clinics are going to take insurance. They’re both open on evenings and on weekends and we see that a lot of easy-to-treat symptoms are going to be treated at these locations,” Schnieders said. “So we think what’s going to happen here is that those two companies are going to become much more integral and a much larger part of the health care system with a very long-term demographic trend at their back.”
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