Drug Stores Poised To Benefit From Potential H1N1 Resurgence

Drug stores are poised to benefit should a second wave of the H1N1 virus emerge in the U.S.

How much the country's three largest drug chains, Walgreen Co. (WAG), Rite Aid Corp. (RAD) and CVS Caremark Corp. (CVS), stand to gain, however, depends on how severe and far reaching H1N1, commonly known as swine flu, becomes.

A more widespread and virulent H1N1 flu has the potential to boost sales of front-of-store items like hand sanitizer, as well as lift the number of drug prescriptions, especially if another wave brings with it bacterial infections among patients. Traffic at drug store retail clinics could also potentially pick up, if people seek treatment for H1N1 symptoms.

Another possible boon: Walgreen, CVS and Rite Aid are all in discussions with state and federal officials to see how they can help with distribution of a swine flu vaccine, expected to be available in mid-October, the companies' spokespersons said. Medical professionals at Walgreen and CVS retail clinics already administer seasonal flu shots each year and also provide vaccinations for things like chicken pox.

Some analysts are making rough estimates of the earnings boost drug stores could see, based on government estimates of how bad a second swine flu wave might be. Sanford Bernstein analyst Helene Wolk, who covers only CVS and has a rating of outperform, says the joint pharmacy benefit management and drug store company's earnings could be lifted around 4 to 8 cents a share. Raymond James analyst John Ransom puts that number higher, at about 10 cents on the retail side and roughly 2 cents on the PBM side.

Ransom estimates that Walgreen's fiscal year earnings could benefit about 17 cents a share, assuming a second dose of H1N1 makes the regular flu season at least twice as strong. He did not provide an estimate for Rite Aid, saying it is too difficult to estimate, given the drug-store chain's turnaround efforts.

However, Rite Aid "should experience a benefit, given it's 10%-plus market share," Ransom said in a note. Ransom has a "strong buy" rating on CVS, and "outperform" ratings on Rite Aid and Walgreen.

While swine flu cases have been relatively mild so far, government officials expect the virus to resurface more significantly in the coming months, as the new school year gets under way and the regular flu season kicks into gear.

As of Aug. 22, 8,843 hospitalizations and 556 deaths were associated with H1N1, according to the Centers for Disease Control and Prevention.

According to a report released last month from the President's Council of Advisors on Science and Technology, H1N1 has the potential to cause between 30,000 and 90,000 deaths in the U.S., concentrated among children and young adults. The report says one "plausible scenario" is that 30% to 50% of the U.S. population could be infected by this fall and winter, with symptoms in approximately 60 million to 120 million people.

The report estimates that more than half of those showing symptoms would seek medical attention, a potential boon for Walgreen and CVS, which operate hundreds of retail clinics around the country.

For their part, drug stores are making sure they are adequately prepared for any possible swine flu resurgence, ensuring stores are adequately stocked with Roche Holding AG's (ROG.VX) Tamiflu and other preventative products.

Rite Aid spokesperson Cheryl Slavinsky said the drug store had seen a spike of Tamiflu sales recently in the Southeast, where an increased number of cases have been reported as students return to school. Tamiflu is a prescription medicine, taken in pill or liquid form, used to treat and prevent the flu.

In the meantime, Rite Aid, CVS and Walgreen are focusing on the regular flu season, launching their seasonal flu vaccine programs several weeks early this year.

Shares of Rite Aid were recently down 2% to $1.51, while CVS dropped 0.3% to $36.33. Walgreen shares fell 1.1% to $33.44.

-By Kelly Nolan, Dow Jones Newswires; 212-416-2167; [e-mail]