Retail Pharmacy to Boost Walgreens Boots Amid Tough Contest

On Mar 23, we issued an updated research report on Walgreens Boots Alliance, Inc.WBA . We are currently looking forward to the company's modified Rite Aid contract, which is expected to benefit the company over the long run. The stock carries a Zacks Rank #2 (Buy).

This leading pharmacy-led, health and wellbeing company has outperformed the broader industry over the last 30 days. The stock has declined 5.4% compared with the broader industry's 7.3% decrease.

Ahead of Walgreens Boots' second-quarter fiscal 2018 results, scheduled for release on Mar 28, 2018, we are upbeat about the company's strength in its Retail Pharmacy USA division and the continued prescription growth on account of Medicare Part D growth and volume expansion from the previously announced strategic pharmacy collaborations.

We are also particularly encouraged by the revised Rite Aid store deal, which has received a regulatory approval last September. Per Walgreens Boots, the modified buyout contract will help it boost the top line and gain operational benefits. It will also aid the company to expand and optimize retail pharmacy network in the key U.S. markets including the Northeast. Notably, a chain of stores and three distribution centers are on the company's purchase list. While the stores are located primarily in the Northeast and Southern United States, the distribution centers are founded in Dayville, CT; Philadelphia, PA and Spartanburg, SC. Post the transaction's initial closing, synergies of $300 million are expected to be realized within four years.

Moreover, increase in Retail Pharmacy International sales buoys optimism. Additionally, we are hopeful about the company's decision to acquire a 40% stake in Sinopharm Holding Guoda Drugstores in China. This should in fact provide a strong impetus to Walgreens Boots' worldwide retail pharmacy business. Also, the company's acceptance of the proposal to sell a portion of its investment in the Chinese wholesale partner Guangzhou Pharmaceuticals Corporation for a huge amount of cash is a major positive.

However, Walgreens Boots faces headwinds in the form of fierce competition and tough industry conditions. Even though the company continues to gain traction from its growth initiatives, major mass merchants are flourishing pharmacy businesses and enjoying a fair market share.

Notably, a slowdown in generic introduction over the last few years has been affecting Walgreens Boots' margins. An escalated reimbursement pressure and generic drug cost inflation too have been hampering Walgreens Boots' margins significantly.

Other Key Picks

A few other top-ranked stocks in the broader medical sector are Bio-Rad Laboratories BIO , athenahealth, Inc. ATHN and Varian Medical Systems, Inc. VAR .

Bio-Rad Laboratories sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here. The company has a long-term expected earnings growth rate of 20%.

athenahealth is a Zacks #1 Ranked player. The company has a long-term expected earnings growth rate of 21.5%.

Varian Medical has a long-term expected earnings growth rate of 8%. The stock carries a Zacks Rank of 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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