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The drugstore sector turned out to be one of the breakout investment stories of 2015, with drugstore stocks including CVS Health (NYSE: CVS), Valeant Pharmaceuticals International (NYSE: VRX) and Walgreens Boots Alliance (NASDAQ: WBA) among the key players to watch.
These companies are all vying for international leadership in ways that continue to upset the traditional, straightforward model of selling pharmaceuticals. Here’s a quick recap for those who may have mistakenly dismissed drugstore stocks.
CVS long ago redefined itself as a diversified business that provides pharmacy services as well as a retail drug business, effectively transforming its business model and opening up a new channel for significant growth. Walgreens, long a second-tier player, gained significant momentum earlier this year when it acquired the Boots chain of drugstores in Europe and continued a significant investment to upgrade the look and feel of its U.S. stores.
Then in December, Quebec-based Valeant – still recovering from an accounting scandal that led it to abandon its partnership with mail-order pharmacy Philidor Rx Services – formed a partnership with Walgreens to sell many of the popular eye and skin treatments it makes for common ailments such as acne and wrinkles.
The Valeant-Walgreen partnership, announced in the final days of the year, seemed to conclude 2015 with a cliffhanger: How will this direct partnership between a drugmaker and a drugstore impact other players? Particularly, how will it impact CVS, which has in recent years seen most of its growth from pharmacy services and is clearly threatened by an alliance between a manufacturer of some common pharmaceuticals and a rival drug chain?
But that was not the only cliffhanger. Days after it announced the alliance with Walgreens, Valeant was back in the news, announcing that – at an undoubtedly critical time for its business – CEO Michael Pearson was going on medical leave for severe pneumonia.
Got all that?
For investors, it may not be entirely clear what this all means for CVS, Walgreens and other drugstore stocks, but here are a couple key takeaways.
Drugstore Stock Cocktail
CVS is on the defensive. The company has already vocally criticized the Walgreens-Valeant alliance, but while it argued that the deal could be bad for consumers, it’s clearly concerned with its own bottom line.
Walgreens continues to enjoy momentum. I wrote earlier this year about how the momentum was with Walgreens, which has innovated in some outside-the-box ways. The deal with Valeant is a sign of more creative innovation.
Valeant stands to benefit significantly, and the stock is already reflecting this. Although Valeant shares lost 29% in 2015, they had lost more than half their value earlier in the year and are starting to rebound.
Expect more change and bold moves in 2016. Walgreens’ alliance with Valeant may best be understood as a bold move in an ongoing game of chess. It may benefit these companies in the short term, but it will ultimately set in motion more moves by rival drugstore chains. This will make drugstore stocks dynamic and interesting in 2016 and create some good opportunities for investors who are willing to put in the research to understand this rapidly changing sector.
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