Recession Proof Explosive Growth at Your Local Pharmacy? (CVS, DVLP, GDRX, WBA, RAD, MDRX, RXMD)

The drug distribution space is probably too often overlooked by investors.

In that domain, you have some central growth themes inextricably tied into the equation – telehealth, healthcare decentralization, emerging diagnostic technology, delivery services, specialty drugs.

All of these thematic concepts are undeniably fertile ground for speculators over the coming decade as the metaphorical synaptic gap between consumers and pharmaceutical producers evolves into the niche of 21st century life.

The upside is potentially unlimited as we redefine the healthcare marketplace to accommodate revolutionary new technologies as well as never-before-seen demographic transformations.

But there’s another factor-based consideration to appreciate here: pharmacy services are historically recession-proof. As the Fed dials up the needle perhaps to the pain point, assets are going to rebalance toward the consumer staples and healthcare sectors. In the course of that allocation transition, the non-cyclical staples players that also have a strong tie to real and dynamic secular growth could potentially represent a recipe for dramatic outperformance.

With that in mind, we take a look below at some of the most interesting stories in the space at different levels of market cap and speculative upside potential.

 

CVS Health Corp. (NYSE:CVS) engages in the provision of healthcare services. It operates through its Pharmacy Services, Retail or Long-Term Care, Health Care Benefits, and Corporate/Other segments.

The Pharmacy Services segment offers pharmacy benefit management solutions. The Retail or Long-Term Care segment includes the sale of prescription drugs and an assortment of health and wellness products, and general merchandise. The Health Care Benefits segment provides traditional, voluntary, and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, Medicare Part D prescription drug plan, Medicaid health care management services, and health information technology products and services. The Corporate/Other segment is involved in providing management and administrative services.

CVS Health Corp. (NYSE:CVS) recently announced that it has agreed in principle to a financial resolution designed to substantially resolve all opioid lawsuits and claims against the company by states, political subdivisions, such as counties and cities, and tribes in the United States. If all conditions are satisfied and the non-monetary terms – which still need to be determined – are finalized, CVS Health has agreed it will pay approximately $5 billion ($4.9 billion to states and political subdivisions and approximately $130 million to tribes) over the next ten years beginning in 2023, depending on the number of governmental entities that agree to join the settlement.

“We are pleased to resolve these longstanding claims and putting them behind us is in the best interest of all parties, as well as our customers, colleagues and shareholders,” said Thomas Moriarty, Chief Policy Officer and General Counsel, CVS Health. “We are committed to working with states, municipalities and tribes, and will continue our own important initiatives to help reduce the illegitimate use of prescription opioids.”

While this is a clear factor, it has been incorporated into a trading tape characterized by a pretty dominant offer, which hasn’t been the type of action CVS shareholders really want to see. In total, over the past five days, shares of the stock have dropped by roughly -5% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities. Shares of the stock have powered higher over the past month, rallying roughly 5% in that time on strong overall action.

CVS Health Corp. (NYSE:CVS) managed to rope in revenues totaling $81.3B in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 10.1%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($20.1B against $72.4B, respectively).

 

Golden Developing Solutions Inc. (OTC US:DVLP) is a much smaller, more speculative name. But we include it here because the company is making a very aggressive play to basically take over the underexploited specialty pharmacy space through an active roll-up strategy that has already established identifiable traction.

The company just recently announced that it closed its 3rd and 4th acquisition in the past two months. But it also announced, just ahead of that, that it has lined up another acquisition that could add as much as $106 million in annual revenues. Its “next acquisition target LOI has been executed by all parties. Bringing this company into our family will more than double our size and place us with an important logistical revenue producing asset. The journey is exciting and continues at full speed,” said Stavros Triant, DVLP CEO.

Golden Developing Solutions Inc. (OTC US:DVLP) followed this up with another positive signal for investors. Companies involved in aggressive acquisition-driven strategies can often engage in dilutive practices that end up prioritizing creditors and founders/insiders over common stockholders. This type of approach always seems to end the same way – as a losing strategy long term. You simply can’t scale up a pubco effectively without establishing credibility with public market investors. That credibility has to be sacred, and companies that want to win over the long term have to prove they understand that.

It looks like DVLP understands this core principle, which is a good sign at this stage of the game. To that effect, the company most recently announced that it has filed to convert 320 million shares of common stock controlled by the Company’s CEO, Stavros Triant, into 320,000 shares of Preferred stock, removing 320 million shares from the pool of publicly traded outstanding common shares.

“We have an aggressive and promising strategy in the specialty pharmacy space, but we recognize that establishing and maintaining a strong relationship with public capital market investors is essential to our long-term success,” noted Triant. “We are determined to demonstrate our commitment to that principle, and this shift to reduce the number of common shares in circulation is just one example of how we plan to accomplish that.”

Golden Developing Solutions Inc. (OTC US:DVLP) management noted in the company’s release that this decision follows a string of recent acquisitions as part of the Company’s roll-up strategy in the Specialty Pharmacy marketplace. The Company also reiterated that it is in the process of finalizing another acquisition involving a target with $106 million in annualized revenues and that more details will be released soon. For a sub-penny OTC stock (caveat emptor) trading on a market cap south of $10 million, that type of headline path matched with a tightening float could be explosive.

 

GoodRx Holdings Inc. (Nasdaq:GDRX) operates a consumer-focused digital healthcare platform. The firm offers information and tools to help consumers compare prices for prescription drugs.

It operates applications and websites that provide prices and discounts at local and mail-order pharmacies.

GoodRx Holdings Inc. (Nasdaq:GDRX) recently released its financial results for the third quarter of 2022, including total revenue of $187.3 million, exceeding previously announced guidance; net loss of $41.71 million; net loss margin of 22.3%; adjusted net income of $29.9 million; adjusted net income Margin of 16.0%; adjusted EBITDA of $52.0 million; adjusted EBITDA Margin of 27.8%, exceeding previously announced guidance; net cash provided by operating activities of $33.7 million; over 865,000 prescribers active on GoodRx in the last 16 months; and data showing that the company exited the quarter with over 7 million consumers of prescription-related offerings.

“We are pleased with the progress made in the third quarter despite near-term challenges,” said Doug Hirsch, co-CEO and co-founder of GoodRx. “We achieved better-than-expected results and addressed the grocer issue in August. While we continued to see some impact from the grocer issue as we expected, the third quasrter was highlighted by double-digit growth in our subscription and pharma manufacturer solutions platforms. Our retail and PBM partnerships remain resilient, and we expanded and enhanced our overall ecosystem this quarter while engaging more deeply with providers and consumers as we work to improve access to affordable healthcare.”

We’ve witnessed 9% piled on for shareholders of the stock during the trailing month, a bounce that has taken root amid largely bearish action over the larger time frame. However, GDRX has evidenced sudden upward volatility on many prior occasions. Moreover, the name has witnessed a pop in interest, as transaction volume levels have recently pushed 23% over what the stock has registered over the longer term.

GoodRx Holdings Inc. (Nasdaq:GDRX) has a significant war chest ($728.8M) of cash on the books, which compares with about $85M in total current liabilities. One should also note that debt has been growing over recent quarters. GDRX is pulling in trailing 12-month revenues of $795.7M. However, the company is seeing declines on the top-line on a quarterly y/y basis, with revenues falling at -4%.

 

Other key players in the pharmacy space include Walgreens Boots Alliance Inc. (Nasdaq:WBA), Rite Aid Corp. (NYSE:RAD), Allscripts Healthcare Solutions Inc. (Nasdaq:MDRX), and Progressive Care Inc. (OTC US:RXMD).

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