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Drug Stores. Trevor Yerrick Section 2. Quick Background. Drug Store Industry Traditional vs. In-store Pharmacy Benefit Managers (PBMs) “Nation’s largest drugstore chain” 8,582 locations, including 8,116 drug stores 2013: $72.2 B in sales, $45.5 B in prescription sales

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drug stores

Drug Stores

Trevor Yerrick

Section 2

quick background
Quick Background
  • Drug Store Industry
    • Traditional vs. In-store
    • Pharmacy Benefit Managers (PBMs)
  • “Nation’s largest drugstore chain”
    • 8,582 locations, including 8,116 drug stores
    • 2013: $72.2 B in sales, $45.5 B in prescription sales
    • Recent trend of expansion through acquisitions
      • Alliance Boots (45%) acquisition in 2012, option to purchase remaining 55% in 2015
steps to using multiples
Steps to Using Multiples
  • 1. Select summary performance measure to use as basis for valuation
    • No single right measure
  • EPAT, NI, and Drug Sales (industry-specific multiple) chosen as performance measures
    • Tough to determine – no two firms are in exactly the same business
    • Easiest numbers to grasp
3 compute market multiples
3. Compute Market Multiples

EPAT Multiple

Enterprise Value = EPAT * EPAT Market Multiple

Equity Value = Enterprise Value - NFL

3 compute market multiples1
3. Compute Market Multiples

NI Multiple

Equity Value = NI* NI Market Multiple

3 compute market multiples2
3. Compute Market Multiples

Industry-Specific Multiple (Drug Sales)

Equity Value = Drug Sales * Drug Sales Multiple

adjustments of comparables
Adjustments of Comparables
  • No pure competitors in the industry
    • Walgreens = only drug store chain
    • CVS Caremark = drug store chain and PBM
    • Express Scripts = only PBM
    • Wal-Mart = over-aggregated, too large
  • Best option = remove Express Scripts from analysis
    • CVS and Wal-Mart have retail pharmacies (WAG’s core business)
adjusted market multiples
Adjusted Market Multiples

EPAT Multiple

Equity value per share: decreased by 40%

adjusted market multiples1
Adjusted Market Multiples

NI Multiple

Equity value per share: decreased by 34%

adjusted market multiples2
Adjusted Market Multiples

Industry-Specific Multiple (Drug Sales)

Equity value per share: increased by 36%

4 5 compute value using multiples
4. & 5. Compute Value Using Multiples
  • Combining Multiples (with and without ESRX)
    • Equity value per share
recommendation for investors
Recommendation for Investors
  • Based on this analysis… BUY
  • The closing price on 1/23/14 = $58.35
    • Significantly undervalued compared to the averages of the market multiples
      • With ESRX included: $80.88
      • Without ESRX: $76.82
confidence in multiples method valuation
Confidence in Multiples Method Valuation
  • Not very high…. for a number of reasons
    • Theoretically difficult
      • Assume comparable companies are accurately valued, but Walgreens is not
    • No perfect competitor for Walgreens in the industry
      • Difficult to determine which comparable companies to include/exclude from multiples analysis
    • 2013 figures vs. 2012 data of comparable firms
    • Could benefit from NEA multiple and other multiples utilizing enterprise value
      • Prevents leverage from affecting the valuation estimates