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Rating outlook raised for Rite Aid

BY Michael Johnsen

NEW YORK Fitch Ratings affirmed Rite Aid’s issuer default rating at ‘B-‘ and revised the rating outlook to stable from negative Wednesday evening, following the chain’s progress in refinancing 2010 debt maturities.

In addition, Fitch has assigned ‘BB-/RR1’ ratings to Rite Aid’s proposed $1 billion credit facility, the new $525 million term loan due June 2015, and the 9.75% $410 million senior first lien secured notes due June 2016.

With Rite Aid’s outlined plan to refinance its 2010, the chain has alleviated bankruptcy concerns, Fitch stated. However, the ratings continue to consider Rite Aid’s significant high leverage and limited capital for investment; operating statistics that significantly trail its two major competitors; and the ongoing risk of improving operations at the acquired Brooks/Eckerd stores. In the near term, a decline in front-end same-store sales could stall operating improvement at both core Rite Aid and Brooks/Eckerd stores, Fitch cautioned.

The ratings also reflect Rite Aid’s strong market share position as the third largest U.S. drug retailer and management’s concerted efforts to improve the productivity of its store base and manage liquidity through working capital reductions and other cost cutting initiatives.

Rite Aid had significant refinancing in 2010 with its $345 million first lien accounts receivable securitization facility maturing in January 2010 (with backstop financing available in place through September 2010) and its $1.75 billion credit facility, $145 million term loan, and $225 million second priority accounts receivable securitization term loan, all due in September 2010. Post the completion of its recent refinancing announcements, Rite Aid will have replaced its credit facility and paid down its $145 million term loan with a combination of a new $900 million to a $1 billion revolving credit facility that the company is currently negotiating, and the recent issuance of $525 million term loan and $410 million in senior first lien secured high yield notes. If the company is successful in securing a three-year $1 billion credit facility, availability under the new facility would be similar to that under its old facility (with availability of $724 million as of Feb. 28, 2009) on a pro forma basis, providing the company with adequate liquidity over the intermediate term.

After the refinancing of the credit facility and the $145 million term loan, the off balance sheet $345 million first lien accounts receivable securitization facility maturing in January 2010 and the $225 million second priority accounts receivable securitization term loan due in September 2010 are the only major remaining debt maturities over the next three years. Considered in the stable outlook is that Rite Aid will be able to replace this debt through refinancing under the existing structure or a combination of first or second lien secured term loans.

Once the refinancing is successfully completed, Fitch anticipates management can turn its full focus on improving core operations and rating movements will largely depend on Rite Aid’s top line and profitability. If Rite Aid is unable to improve average weekly prescriptions per store (which has been flat at around 1,150 for the last few years, versus Walgreen at 1,835 and CVS/Caremark at 1,630 in their most current fiscal years) or gain traction at the Brooks/Eckerd stores, EBITDA margins are likely to remain pressured on weak top line growth and market share losses. Rite Aid’s EBITDA margin at 3.7% for fiscal year ended Feb. 28, 2009 is significantly below its two leading competitors’ margins from 7.5% to 9%.

In the near term, Fitch expects anemic pharmacy same-store sales and a decline in higher margin front-end, same-store sales could pressure gross margins. As a result, free cash flow could be neutral to slightly negative in fiscal year 2010 and adjusted debt/EBITDAR for fiscal year 2010 and fiscal year 2011 will remain at or be slightly above the 7.4 times reported for fiscal year 2009. Rite Aid’s ability to appropriately invest in its stores given its current free cash flow levels and indebtedness remain a concern as Fitch views the projected $250 million in capital spending for fiscal year 2010 below levels required to remain competitive.

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Pharmacy groups brief Congress on health, cost benefits of MTM

BY Jim Frederick

WASHINGTON Extending a long campaign to educate federal lawmakers on the value of pharmacy-based patient care services, three pharmacy groups Tuesday briefed members of Congress on the benefits of pharmacist-provided medication therapy management.

Hosting the briefing: the National Association of Chain Drug Stores, the National Community Pharmacists Association and the Iowa Pharmacy Association. The event was moderated by Edith Rosath, SVP pharmacy affairs and chief economist at NACDS, and included participants from the University of Tennessee College of Pharmacy, Mirixa and the University of Iowa. Rep. Dave Loebsack, D-Iowa, also addressed the informational briefing.

The briefing panel discussed patient-care benefits of MTM, the practical impact on providing healthcare to rural and underserved populations, and the cost-saving potential for inclusion within comprehensive healthcare reform legislation.

“As the face of neighborhood healthcare, pharmacists are medication experts, and are uniquely in tune with their patients’ medication needs and requirements,” said NACDS president and CEO Steve Anderson. “Pharmacist-provided medication therapy management enhances the pharmacist-patient relationship, improves communication and dialogue, encourages proper patient adherence to medication regimes, and provides unique and individual healthcare services, especially to those patients who suffer from chronic disease.”

Anderson thanked lawmakers “for listening to the nation’s medication experts at today’s informational briefing,” and cited the benefits of MTM and other pharmacy services. Those innovations, he told members of Congress, “have the ability to transform the healthcare delivery system in America and improve individual health care, encourage a healthier population while also reducing overall costs.”

NCPA EVP and CEO Bruce Roberts also addressed the gathering, admonishing lawmakers that pharmacists “are much more than the purveyors of a commodity. They offer a wide array of services that can maximize the benefits of medications for patients.

“That’s why we strongly support medication therapy management and believe those efforts can be buttressed through the legislative process,” Roberts added. He praised Rep. Loebsack, in particular, for his efforts to expand MTM services.

“Now more than ever, as we discuss healthcare reform and improving medication adherence, embracing pharmacist-provided MTM is a no-brainer,” Roberts noted.

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Waxman asks Obama to look for alternative pathway for biosimilars

BY Alaric DeArment

WASHINGTON With biosimilars legislation stalling in both houses of Congress, one of its chief proponents is calling on the Obama administration to let the Food and Drug Administration approve the legistlations with or without a regulatory pathway, according to published reports.

The Associated Press reported Monday that Rep. Henry Waxman, D-Calif., has asked the administration to look for ways to grant approval for biosimilars before either of the bills passes, to allow the FDA to approve them.

Waxman — who co-sponsored the Hatch-Waxman Act of 1984, creating a regulatory pathway for generic pharmaceutical drugs — introduced a bill on March 11 to allow biosimilars. That bill, H.R. 1427, would grant biotech companies five years’ market exclusivity before their products faced biosimilar competition. Waxman’s bill, with 11 co-sponsors and a companion bill in the Senate, competes with fellow California Democratic Rep. Anna Eshoo’s H.R. 1548, introduced six days after Waxman’s, which would grant up to 14 years of exclusivity to biotech companies and had 87 co-sponsors in the House as of Tuesday.

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