Rite Aid, one of the largest pharmacy chains in the United States, filed for bankruptcy on Sunday, burdened by billions of dollars in debt, declining sales and more than a thousand federal, state and local lawsuits alleging the company owed thousands illegal prescriptions issued for painkillers.
The company filed for Chapter 11 bankruptcy protection in New Jersey. Its largest creditors include pharmaceutical company McKesson Corporation and insurer Humana Health.
The company also named a new CEO, Jeffrey Stein, to lead the restructuring. Mr. Stein is the founder of Stein Advisors, a financial advisory firm focused on turning around troubled companies. Elizabeth Burr has served as Rite Aid’s interim executive director since January.
Rite Aid is one of many drugstore chains facing lawsuits related to deadly opioid abuse in the United States. In March, the Justice Department filed a complaint against Rite Aid and its various subsidiaries, alleging the company wrote prescriptions for excessive amounts of opioids “that had obvious and often multiple warning signs indicating abuse.”
The company has denied these claims.
Rite Aid, which employs more than 45,000 people, has struggled in recent years to compete with larger rivals such as CVS and Walgreens Boots Alliance, as well as Amazon. Due to declining sales, the company had less money to invest in its operations and it became more difficult to repay its debts. According to corporate filings, the company had $3.3 billion in debt as of June, not including pending opioid litigation.
Rite Aid shares have fallen nearly 80 percent since the beginning of the year.
This series of problems “just created the perfect storm,” said Sarah Foss, global head of legal and restructuring at financial services firm Debtwire. “I think Chapter 11 is really the only way for someone like a Rite Aid to sort this all out. Basically, bankruptcy allows everything to be settled in one forum.”
Rite Aid has closed several stores in recent months and is preparing to close hundreds more. The company’s shrinkage has made it even more difficult to compete.
“Because they closed so many stores, if you need something, you don’t necessarily have a Rite Aid next to you, so you have to go to a competitor,” said Chedly Louis, vice president at Moody’s Investors Service, which follows Rite Aid. “So that’s another reason you have weakness.”
Mr. Stein, the company’s new leader, said his focus will be on guiding the company through the bankruptcy process when it is able to reduce debt to help the chain “realize its full potential as a modern neighborhood pharmacy.” .
The bankruptcy filing is a dramatic collapse for what was once the largest drugstore chain in the USA. In 1998, Rite Aid’s market value was nearly $13 billion. It closed Friday with a market value of less than $40 million.
“The company hasn’t been well run for a long time,” said David Silverman, retail analyst at Fitch Ratings. “They are stuck in a constant inability to improve their fortunes.”
Rite Aid said Sunday that it is working on a possible deal to sell Elixir, the pharmacy benefit manager it bought for $2 billion in 2015, to MedImpact. Any deal requires approval from a bankruptcy judge.
Pharmacy benefit management companies, often referred to in the industry as PBMs, act as intermediaries on behalf of employers and health plans, providing services such as negotiating drug discounts.
Elixir was a challenge for Rite Aid because its smaller size put it at a disadvantage when negotiating larger contracts that could generate more money. CVS Caremark, Cigna’s Express Scripts and UnitedHealth Group’s OptumRx are the three largest pharmacy benefit managers, processing about 80 percent of all prescription claims in the United States.
“It would have been different if they had been able to grow this business and this PBM,” Ms. Louis said.
In recent years, Rite Aid has been closing stores to keep up with declining sales. There are now about 2,000 locations in 17 states. CVS Pharmacy, on the other hand, has more than 9,500 stores and Walgreens has around 8,700.
Rite Aid significantly reduced its store base after a failed merger with Walgreens in 2017. The Federal Trade Commission had antitrust concerns about the merger of two of the nation’s largest drugstore chains. When the merger fell through, Rite Aid agreed to sell more than 2,000 stores — about 48 percent — as well as three distribution centers to Walgreens for $5.18 billion. At the time, Rite Aid said it would retain its best-performing locations, and John Standley, its chief executive, said the sale of those assets would be an “important strategic transformation” for the company.
Fitch’s Mr. Silverman said Rite Aid “generated quite a bit of cash” from the sale and used it to pay down debt. But he added: “From a competition perspective, they are even smaller now.”
Rite Aid later attempted to merge with grocery chain Albertsons, but the deal was canceled in 2018 after the company lost support from Rite Aid shareholders.
During the pandemic, Rite Aid initially benefited from a sales boom as people stocked up on hand sanitizer and cleaning and beauty products. The company accelerated its technology offerings, opened smaller stores to meet pharmacy needs and said it was focused on attracting more Millennial and Generation X customers. Rite Aid saw profits increase and losses narrow.
But as the pandemic continued, customers began going to drugstores more frequently, limiting Rite Aid’s ability to make impulse purchases. Social distancing measures resulted in a less severe cold and flu season in the first winter of the pandemic, resulting in a sharp decline in the company’s cough, cold and flu business.
“We just didn’t know how evaporated this business would actually be,” said Heyward Donigan, Rite Aid’s chief executive at the time, in an interview on CNBC in 2021.
As earnings fell, the debt burden became ever greater. “It’s about cash flow,” said Ms. Louis of Moody’s.
In June, Rite Aid reported revenue of $5.7 billion for its most recent quarter, down from $6 billion a year earlier, partly due to ongoing difficulties selling goods such as groceries, beauty items and home goods. Consumers are increasingly turning to Amazon, corner stores and elsewhere to purchase these goods.
The company was founded in 1962 as Thrif D Discount Center in Scranton, Pennsylvania. In 1968, the chain changed its name to Rite Aid and became a publicly traded company that year. Its founder and CEO, Alex Grass, helped rapidly expand the company and its stores over the next decade, expanding west into Michigan, Ohio, and along the Gulf and West Coasts. For a time, Rite Aid was the largest drugstore chain in the country and the largest in New York City.
In the late 1990s and early 2000s, Rite Aid was involved in a securities and accounting fraud case. Former Rite Aid executives – including Martin Grass, the son of Rite Aid’s founder and former chief executive – have been charged in a securities and accounting fraud that regulators said led to a $1.6 billion earnings restatement had, at the time, the biggest correction of all time. The company was forced to adjust its profits in 2000.
Elizabeth Burr, Rite Aid’s current chief executive, took over after Ms. Donigan abruptly left in January after four years in the position.
Drugmakers have also filed for bankruptcy amid legal battles over their role in the opioid crisis. In August, opioid maker Mallinckrodt Pharmaceuticals filed for bankruptcy for the second time in three years. Last year the company had promised to pay $1.7 billion, but after making one payment and missing a second in June of this year, it devised a plan with its creditors to recover much of the $1.25 billion dollars that the company still owed under the original settlement agreement. In return, Mallinckrodt paid $250 million before its second bankruptcy.