In a new report, analysts at Jefferies took an in-depth look at food and drug stocks and updated their outlook for three stocks in the space. Overall, analysts see improving margins in the drugstore business in coming years.
Generic Margins On The Rise
Analysts predict that the 2015 transition from branded to generic drugs will produce about a 50 percent increase in profit dollars per script for drugstores.
According to the report, investors should expect a $450 million overall boost to drugstore profits from new generic drugs in 2015 and a $550 million boost coming in 2016. These numbers dwarf the $220 million boost from new generic drugs reported in 2014.
Analysts believe that Rite Aid Corporation RAD is in the best position to capitalize on the generic drug wave.
Generic Cost Inflation
While the overall margin opportunities offered by generic drugs are much better for drugstores, the cost of generic drugs is also on the rise. According to the report, generic drug prices have risen 2.8 percent in the past year.
Factors contributing to the rising cost of generic drugs include industry consolidation, periodic drug supply disruptions and increased regulation.
Despite higher costs, analysts believe that recent sourcing pacts between drugstores and drug distributors will produce up to five percent cost savings for drugstores.
Top Stock Pick
Buy-rated CVS Health Corp CVS is Jefferies’ top stock pick in the space. Jefferies recently raised its price target for CVS to $120.
Jefferies has a Hold rating on Rite Aid and a $9 target for the stock.
Walgreens Boots Alliance Inc WBA is also Hold-rated and has been assigned a $90 target.
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