The No. 1 Drugstore Stock to Own Now

When CVS Health (NYSE: CVS) announced that it was paying over $10 billion for Omnicare (NYSE: OCR), it was just the latest buyout in a merger- and acquisition-crazed health care industry.
But it appears to be a really smart move for CVS, where the acquisition gives the drug giant exposure to the rapidly aging population in the U.S. Omnicare delivers and manages drugs for senior-living facilities.
This is the biggest acquisition CVS has made since acquiring the pharmacy-benefits manager (PBM) Caremark. That move crafted CVS into a drugstore-PBM hybrid and also made CVS the country’s second-largest PBM. Since the Caremark buyout, shares of CVS have outpaced the S&P 500 return by nearly fivefold.
The PBM model is becoming more and more attractive, and for good reason. PBMs can use their scale to negotiate lower drug prices with drug manufacturers.
Many players are trying to get in on the action as well. Earlier this year Rite Aid (NYSE: RAD) spent $2 billion to acquire a PBM, EnvisionRx. And UnitedHealth Group (NYSE: UNH) bought up the PBM Catamaran Corp. (NASDAQ: CTRX) for $12 billion.

The No. 1 Drugstore Stock: All Eyes on Walgreens

With CVS’s latest move into the senior-living space, all eyes are on Walgreens Boots Alliance (NYSE: WBA) to make its next move. Could it be a PBM?
Express Scripts (NASDAQ: ESRX) is still the nation’s largest PBM. Recall that Walgreens has had its issues with Express Scripts in the past, but a merger would help counter further risk in that regard. And there’s new management in place since the Walgreens-Express Scripts fallout.
Walgreens is reportedly ahead of schedule with the integration of Alliance Boots, which is the European pharmacy retailer it bought for $16 billion a couple years ago.
The time for a transformative deal in the drugstore space has never been better. Drug-related spending will likely continue to grow over the next few years as the population in the U.S. continues to age at a rapid rate.  Another big driver: ObamaCare and the expansion of health care coverage.
Another opportunity is for Walgreens to get more focused on the retail side and buy up Rite Aid. Right now, Walgreens and Rite Aid are No. 1 and No. 3, respectively, in terms of U.S. retail pharmacy market share. The two combined would have close to 13,000 stores, versus CVS’s 8,000.

Why PBMs Matter

But Walgreens really needs is a way to leverage the large installment of drugstore customers it already has; hence, we’re back to the PBM case.
Much of Walgreens’ prescription revenue is generated from insurers and managed-care organizations, where the mega PBMs like Express Scripts are the ones representing these very customers.
Large PBMs like Express Scripts have pricing power because they process a huge volume of claims. Walgreen can only push back so much on these pricing pressures. And with two-thirds of its revenues generated from prescription drug sales, pricing advantages (or relief) on drugs would be a big positive.
Judging by CVS’s marked success with PBM, Express Scripts seems the most likely target for Walgreens. Regardless, Walgreens is still an interesting story given the expansion to overseas markets with the Alliance Boots acquisition. Alliance Boots is also a health and beauty products company, so look for Walgreens to start using those products in its storefronts to drive higher margin sales of non-drug items.
CVS’s stock has already seen an impressive run over the last year, but Walgreens could just be getting started.

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