Rite Aid FY 1Q16 Earnings Call Notes

Beginning to cycle medicaid expansion growth

“We increased same-store sales by 2.9% over the prior year period, which was driven by 1.66% increase in same-store prescription count. But we — are beginning to cycle growth that occurred in states that expanded Medicaid coverage in 2014, we continue to benefit from this trend in the quarter.”

Improved loyalty program

“Perhaps, the biggest news of the quarter was our successful launch of wellness+ with Plenti, which is part of the first coalition loyalty program in United States. This enhancement to wellness+ allows our members to continue earning all of the terrific benefits that they’ve grown accustomed to over the past five years.

Script comp growth will become more difficult for next several months

We are now cycling last year’s strong Medicaid expansion benefit. So our expectation is that script comp growth comparison will become more difficult for the next several months.”

We’d like to have more counters

“In the long run, we’d certainly love to have more counters. So, I think that’s a strategic opportunity for us as we look forward. So, we are continuing to go through ways to work on that. We are excited about Envision but maybe, if there are some things that make sense over time to add to Envision to kind of round it out in terms of its capabilities. But I think those are kind of our primary focus areas. We’ve put a lot of capital back into our store base. We think that’s important.”

The experience in the store is key

“So the interaction in our stores is really critically to our strategy. The wellness ambassadors, pharmacist, even our front-end associates, coaches from Health Dialog, the things we’re really trying in clinics. So we are really trying to focus on things that make that experience in the store really what we want it to be. And I think those are the kind of things that we are going to focus on.”

Rite Aid FY 4Q15 Earnings Call Notes

Medicaid expansion, good cold/flu season drive good script count growth

“Same-store sales increased 4.5% which was driven by a 3.5% increase in same-store prescription count. As in past quarters, we continue to see script count growth in states with expanded Medicaid and also benefited from our prescription file buy initiative and an increase in cold and flu related incidents compared to the prior year fourth quarter.”

Rapid medicaid growth from last year provides a headwind to this year’s comps

“Well I think we’re, John we’re in a cycle, gradually over the next few months we are going to cycle some rapid growth last year in Medicaid expansion so that’s, it builds through the first couple of quarters, we could grow and I think we’re going to work our way through that over the next couple of quarters so I think that’ll, that’s a little bit of a headwind we have to work through so I think that’s part of what you’re seeing there.’

Synergies with clinics

“I guess there is a couple of parts to that, first of all we’re seeing some net new customers which we think is a real positive in those and there are scripts coming out of those that are getting filled at our stores. So, I think from a revenue synergy perspective it is kind of two things going on there that seem positive to us and in terms of the square footage of the merchandising impact.”

Reimbursement rate is biggest pressure on EBITDA

“So it’s probably, it’s more reimbursement rate than it is those other investments but it is all of them combined that is impacting guidance that we are giving.”

It’s a cost reduction environment though

“it’s hard for me to parse to take McKesson out of that equation and say without McKesson generic inflation is X or Y because we do buy through McKesson on everything. And overall it’s our expectation that our net generic drug cost is going to come down. So we think it’s to us a net deflationary market. We do know that there will be individual drugs that there will be instances where we’ll see some cost increases throughout the year that’s a constant battle that we fight every year. But our overall our guidance reflects the fact that we think we’re going to be overall in a cost reduction environment versus a cost increase environment.”

We’re going to see cost savings from McKesson relationship

“I probably can’t I will again tell you that you that we think there is substantial value from the McKesson relationship, again we expect that we’re going to reduce our overall drug spend and unfortunately we still are digesting some rate pressures through this fiscal year and that’s eating up a lot of those savings.”

Rite Aid FY 2Q15 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Medicaid expansion states driving growth

“Our total comparable store sales increased by 4.1% in the quarter driven by a 3.7% increase in comparable scripts. Higher utilization in Medicaid expansion states drove this increase as well as the result of our pharmacy initiatives.’

Guiding pharmacy GM lower along with profitability

“we expect pharmacy gross margin in the second half of fiscal ’15 to be lower than previous estimates based upon current estimates for reimbursement rates and anticipated lower profitability due to a delay in the introduction of a generic equivalent to Nexium and due to higher cost for generic drugs that recently lost their exclusivity. Therefore, we have lowered our guidance for adjusted EBITDA, net income and net income per diluted share.”

Reimbursement rate environment tougher than we thought

“I would say the reimbursement rate environment seems a little tougher in the back half than we expected. And I’m sure as you know John, the reimbursement rate view evolves all the time. You know both have plans and our negotiation and we have migrations inside the plans and a number of different things going on all the time related to reimbursement rates. So that’s a view we are constantly updating and looking at. And based on what we can see at this time, the back half looks a little tougher than we initially expected even as of June.”

Distribute 40b of drugs per year

“keep in mind that we dispense at the AWP level about $40 billion worth of drugs a year. So even a modest few basis points in reimbursement rate change in our view can have impact on earnings. ”

It’s a competitive marketplace

” I think it’s a competitive marketplace out there. I think there are some probably dynamics at work in the PBM marketplace as well as in federal and state governments that are also playing in to some of the activity that we see from a reimbursement rate perspective. Those are probably the broader trends I can point at.”

The reimbursement needs to go to patient value

“the value that we create through what we do today is not by having the absolute lowest cost on the pill that we purchase. I mean, honestly, average generic drug cost that we sell is maybe $25-$27, something like that. And, so how much money are we going to save on a $25 or $30 prescription. That’s not really the question at the end of the day. The question is, is the patient compliant? Are they getting the counseling the need? Did they understand what they need to do to improve their health and stay out of emergency rooms and doctors offices.

So, again, we are talking philosophically here. I do not have the specific answer, how this migration is going to occur. But I think over time, there is only so many dollars we are going to be able to squeeze out of the drug spends, particularly on the generic side. And so, it’s really going to come down to then what differentiates you in the marketplace. If not, then you can fill that script for $24 versus $25. It’s what did you do to help a patient. So at some point, I think the model migrates to something more where maybe there is a reimbursement for the service that you are providing to the patient versus trying to make gross margin on the script. Is that going to happen tomorrow, it’s not. But I think if we look over the longer-term, that’s really probably the model that our industry needs to begin the migration to over some period of time.”

Mckesson deal is a big deal

“The thing with McKesson was really a timing issue in terms of just getting the thing implemented. And it’s important to understand that it was a massive transition for our company. I mean we put in a huge amount of effort and so did McKesson to get this thing done in the timeframe that we did. Really, I believe strategically we are headed in the right direction here. I mean I think our combined purchasing power is going to help us get the lowest cost over time. ”

maybe some green shoots of growth from exchange insureds?

“On a much, much, much smaller basis there is a, starting to be a developing trend there. As we talked about before there are some plans, Mark, where they are fairly specific to exchange based healthcare. It doesn’t cover all the exchanges but there is a few that are pretty focused on the exchanges and even those are starting — they are not material yet in total number but those are actually growing pretty rapidly right now too. “

Rite Aid 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

EBITDA decline from lower drug reimbursements

“Adjusted EBITDA for the quarter was $282.6 million as compared to $344.8 million during the prior-year period. This result was driven by a reduction in pharmacy gross profit due to lower reimbursement rates that were not offset with reductions in generic drug costs”

Mckesson distribution agreement will deliver working capital benefits

“As announced in February, we are transitioning to a new drug sourcing and distribution process through our expanded partnership with McKesson. This new process is expected to deliver long-term drug cost savings and will provide our pharmacies with direct to store delivery five days a week, which will provide significant working capital benefits.”

New purchasing model creates short term hit to GM

“As we transition to our new purchasing model, we expect lower pharmacy gross margin during the transition period, because we are unable to negotiate lower drug cost as we normally would do to offset reimbursement rate pressure and generic drug cost increases”

There are indications that ACA is having an impact

“In terms of our script count, there’re indications that the Affordable Care Act is beginning to have a positive impact as we’re experiencing growth in states that have expanded Medicaid. In addition, we’re seeing high utilization among our patients”

Remodeled stores outperforming

“We now have completed 1,325 Wellness remodels, which represents 29% of all Rite Aid locations. These stores continue to outperform the rest of the chain in terms of same-store front-end sales and script count’

Reasons for reimbursement rate pressures:

“In terms of reimbursement rate pressures, I guess there’s a few things. We’re always dealing with a competitive reimbursement rate environment. Things that can develop differently than our plans would include just a mix of business amongst and within plans, so migration to narrow networks and business moving between different types of plans can have an impact on reimbursement rates. We also still have certain contracts that are not in a kind of guaranteed rate. We call those MAC contracts. So those can be a little bit more volatile.”

A delicate transition to having McKesson manage costs

“during the transition period of moving from managing the cost ourselves to having McKesson manage our cost, there is just a period of vulnerability that occurs here where we don’t have as much leverage in the marketplace.”

The incremental exchange plan customer isn’t driving high utilization

“n terms of exchange-based plans, probably 70% of the people that we can identify related to an exchange-based plan came from another plan where we already had them as customers. So the net incremental piece of that was much smaller. And those people, those net incremental patients haven’t been huge utilizer as yet. So the utilization as a percentage of those plans is probably less than the average.”

Medicaid expansion is a different story

“A little bit of a different story in the Medicaid. In the Medicaid expansion states, we’ve seen strong script growth, as Frank mentioned in his comments, particularly when you compare them to the non-Medicaid expansion states, where there isn’t much growth. So it’s clearly had an impact.”

One of the reimbursement pressures is plan mix

“Another situation would be we might have a contract with a PBM where we’re in different plans. One is a very narrow plan. One is a medium plan and one is the broad plan. And we might see as we come through into the fiscal year gradually as there’s utilization that the PBM has migrated patients from the broad plan, which has the highest reimbursement rate, to either the middle plan or the lowest reimbursement rate plan. And we call that a change in plan mix”

Narrow network plans a growing thing

“I do think the narrow network thing continues to build a little bit. And I think we see it not only in our managed care plans, but also probably in Medicare Part D plans as well.”

The narrow network is one of the reasons we did the Mckesson deal in the first place

“And it’s right back to one of the important strategic reasons why we need to be very competitive on our drug cost, which is why we started down the road on this McKesson relationship to begin with. The combined purchasing power, we think, over the long term will make us a competitive provider of solid drug prescription delivery over the long term, which is really kind of where we’re going with the McKesson relationship.”

Rite Aid 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Timing of generic wave creates tough comps in Q1

“We’re going to cycle a couple of big generic impacted quarters in the first half of 2015. We’re going to be comparing to some pretty tough comparables from 2014.

But we’re still benefitting from the large generic wave, so we’ve got some very tough comparisons in the first half of the year. Because we are expecting Nexium and Diovan really to be later in fiscal 2014. So we put them in the back half is really the way we’ve addressed that in our guidance. So what that’s kind of causing is first half earnings to be a little bit softer and back half earnings to be a little bit stronger in our guidance.”

Some inflation in generic drug prices

“On inflation, we’re watching recent trends. Towards the end of this fiscal year, we saw some cost increases come through, which will impact fiscal ’15, so we had some visibility from that. It’s also been a bit of a developing broader trend, so you do have to use some judgment and estimates to kind of get at it.”

Getting to the fun stuff

“One of the exciting things that we’re working on now, we’re getting to the fun stuff, is really starting to map out a real staged strategy and rebuild our pipeline and do a lot of the fun stuff that we haven’t gotten to do for a five years.”

Start the real estate strategy by filling in existing markets

“I think we have an opportunity, in the early stages of our store growth strategy, to really get at those markets and fill them in a little bit. Then there’s probably some contiguous opportunities for us to get at, which we think have good economics associated with them. And while we’re probably working on those opportunities, we’ll be working on the underlying strategy to maybe crack into a couple of additional markets.”

We’re good at giving stuff away

“Could we get more aggressive in the short term and spike our comps a little bit? We’re good at giving stuff away, we know how to do that. We can do that, but to your point, I think we are trying to be rational about it, do it in an effective way that builds relationships with customers, using Wellness Plus.”

A core group of patients driving prescriptions

“there’s a core group of patients that really make up a big percentage of our script count.”