UPDATE 2-Drugstore operator Rite Aid expects pricing pressure to continue

Thu Jun 19, 2014 3:19pm EDT

(Adds details from conference call, updates share movement)

June 19 (Reuters) - Drugstore operator Rite Aid Corp said higher drug costs and a fall in reimbursement rates would continue into the second quarter, sending it shares down 4.4 percent.

The third-largest U.S. drugstore operator said a delay in the expected fall in prices of generic drugs raised costs in the first quarter, squeezing margins.

For drugstore retailers, generic drugs generate lower revenue but higher profit than branded medicines. But there has been a slowdown in the introduction of generic drugs in the past few months.

Rite Aid's shares have been on a tear for most of the past year, until the company warned on first-quarter profit and cut its full-year earnings forecast earlier this month.

The drugstore chain has been betting on a significant increase in the number of aging baby boomers in the United States and the millions expected to gain healthcare insurance under the Affordable Care Act.

But the company's first-quarter profit barely met analysts' estimates, disappointing investors used to handy earnings beats over the past few quarters.

Rite Aid said in February it had expanded its distribution agreement with McKesson Corp under which the drug wholesaler would also supply generic drugs to the company. Earlier, McKesson only supplied branded medicines.

Rite Aid said it expects lower pharmacy gross margins during the transition period as it is unable to negotiate lower drug costs and faces reimbursement rate pressures.

"This increased vulnerability to reimbursement rate changes and generic drug cost increases will continue during a portion of the second quarter as we complete the transition," said Chief Executive John Standley on a post-earnings conference call.

Rite Aid's net income more than halved to $41.4 million, or 4 cents per share, in the first quarter ended May 31. Net sales rose 2.7 percent to $6.47 billion.

Analysts on average had expected a profit of 4 cents per share on sales of $6.43 billion, according to Thomson Reuters I/B/E/S.

Gross profit dropped to 27.89 percent from 28.94 percent.

Rite Aid maintained its sales forecast of $26 billion-$26.5 billion for the year ending March 1. Analysts on average were expecting sales of $26.19 billion.

Rite Aid shares, which have more than doubled in the past year, were down 4 percent at $7.15 in late afternoon trading on Thursday on the New York Stock Exchange. (Reporting by Shailaja Sharma and Tanya Agrawal in Bangalore; Editing by Kirti Pandey and Saumyadeb Chakrabarty)

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