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Rite Aid reports solid Q2 but revises guidance due to ‘pharmacy headwinds’

BY Michael Johnsen

 

CAMP HILL, Pa. — Rite Aid on Thursday reported revenues of $6.5 billion for its second quarter ended Aug. 30, representing a 3.9% lift credited to rising pharmacy same-store sales. Rite Aid revised its year-end guidance, however, based on anticipated lower pharmacy margins going forward. 
 
"In the second quarter, our team of dedicated Rite Aid associates worked together to execute our strategy and deliver results that reflect growth in net income and adjusted EBITDA and significant increases in same-store sales and prescription count," stated Rite Aid chairman and CEO John Standley. "Heading forward, while we believe that our key initiatives will continue to drive top-line growth, we are revising our guidance based on lower than anticipated pharmacy margin in the second half of fiscal 2015. As we navigate these headwinds, we will remain focused on growing our business, generating continued operational efficiencies and positioning our associates to deliver a consistently outstanding experience for our customers."  
 
Same-store sales for the quarter increased 4.1% over the prior year, consisting of a 1.1% increase in front-end sales and a 5.6% increase in pharmacy sales. Pharmacy sales included an approximate 199 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores increased 3.7% over the prior year period.
 
Prescription sales accounted for 68.8% of total drug store sales, and third-party prescription revenue was 97.5% of pharmacy sales.  
 
Net income was $127.8 million or $0.13 per diluted share compared to last year's second quarter net income of $32.8 million or $0.03 per diluted share. The improvement in net income resulted primarily from an increase in adjusted EBITDA, a lower LIFO charge due to pharmacy inventory reductions and a $62.2 million loss on debt retirement in the prior year, partially offset by higher income tax expense. 
 
Adjusted EBITDA was $364.2 million or 5.6% of revenues for the second quarter compared to $341.6 million or 5.4% of revenues for the like period last year. Adjusted EBITDA improved due to an increase in front-end and pharmacy gross profit, partially offset by an increase in selling, general and administrative expenses related to the company's higher level of sales. 
 
The improved pharmacy gross profit was driven by the increase in pharmacy revenues and the impact on inventory valuation related to the company's transition to its new drug purchasing and delivery arrangement with McKesson, partially offset by lower reimbursement rates. The net effect on inventory valuation resulting from the transition to the outsourced McKesson arrangement is not expected to be material to fiscal 2015 results, but did increase gross profit, adjusted EBITDA and pre-tax income by approximately $40 million in the second quarter.  
 
In the second quarter, the company relocated 5 stores, remodeled 117 stores and expanded 1 store, bringing the total number of wellness stores chainwide to 1,433. The company also opened 1 store and closed 10 stores, resulting in a total store count of 4,572 at the end of the second quarter.  
 
Based upon current estimates for reimbursement rates and anticipated lower profitability from new generics and generic drugs that recently lost exclusivity, the company is expecting decreases in pharmacy margin in the second half of fiscal 2015 as compared to its prior estimates and therefore is lowering its guidance for adjusted EBITDA, net income and net income per diluted share. Adjusted EBITDA is expected to be between $1.2 billion and $1.275 billion. Net income is expected to be between $223 million and $333 million and income per diluted share between $0.22 and $0.33. The company is also narrowing guidance for sales and same-store sales. Sales are expected to be between $26 billion and $26.3 billion and same-store sales to range from an increase of 3% to an increase of 4% over Fiscal 2014. Capital expenditures are expected to be approximately $525 million.  
 
Following the news of the revised guidance, shares of Rite Aid were trading down about $1.08 in late-morning trading to $5.56 as compared to yesterday's close. 
 
 

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GPhA provides input on GDUFA to FDA

BY Michael Johnsen

WASHINGTON — The Generic Pharmaceutical Association on Thursday provided input on the Generic Drug User Fee Act process before the Food and Drug Administration. 
 
"GDUFA is a historic achievement for both FDA and the generic pharmaceutical industry," the association stated. "The association and its members fully support GDUFA objectives with 100% industry-generated funds. In fact, last year the industry contributed $300 million to support the three core public health aims of GDUFA: safety, access and transparency. For GDUFA to be successful it must be implemented in a way that is mindful of the realities of the generic drug marketplace, and continues to incentivize the development of generic drugs for patients."
 
GPhA urged the FDA to dedicate resources to address the growing backlog of abbreviated new drug applications and prior approval supplement submissions. GPhA also noted that a significant portion of the issues identified during the technical reviews can be classified as "easily correctable deficiencies." Industry can respond to these ECDs within a five day timeframe, GPhA stated. 
 
"GPhA looks forward to the continued dialogue on improving GDUFA, particularly efforts to make generic drug approvals more predictable and consistent," the association added. "This could include more communication with applicants and continued meaningful interaction with the generic industry during agency development of new guidance or before agency enforcement of draft guidance as final."
 
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Dollar General remains committed to Family Dollar deal

BY Michael Johnsen

GOODLETTSVILLE, Tenn. — In response to the decision by the board of directors of Family Dollar Stores to reject Dollar General's tender offer to acquire all outstanding shares of Family Dollar for $80.00 per share in cash, Dollar General on Thursday stated that it remains committed to acquiring Family Dollar.
 
The company also stated that it remains confident in both its antitrust strategy and the analysis performed by its antitrust advisors.
 
"Dollar General has made every good faith effort to engage in constructive discussions with the Family Dollar board of directors," stated Rick Dreiling, chairman and CEO of Dollar General. "At each turn, despite Dollar General's superior proposals and to the detriment of the Family Dollar shareholders, the Family Dollar board has refused to engage, leaving Dollar General with no choice but to launch a tender offer," he said. "Rather than engaging with us in a meaningful and constructive manner, the Family Dollar board has continued its efforts to distract shareholders from the main issue at hand – that a superior proposal adequately addressing antitrust issues remains on the table. Through our tender offer, Dollar General has provided all Family Dollar shareholders a voice in this process, and we urge them to tender into our offer." 
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