(Adds details from conference call, updates share movement)
June 19 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
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
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
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)