Rite Aid, Facing Slumping Sales and Opioid Suits, Files for Bankruptcy

Rite Aid, one of the largest pharmacy chains in the United States, filed for bankruptcy on Sunday, weighed down by billions of dollars in debt, declining sales and more than a thousand federal, state and local lawsuits claiming it filled thousands of illegal prescriptions for painkillers.

The company filed for Chapter 11 bankruptcy protection in New Jersey. Its largest creditors include the pharmaceutical company McKesson Corporation and the insurer Humana Health. The pharmacy has raised $3.45 billion to fund its operations while it is in bankruptcy, during which it expects to continue to operate its stores and serve its customers.

The company also appointed a new chief executive, Jeffrey Stein, to lead its restructuring. Mr. Stein is the founder of Stein Advisors, a financial advisory firm that focuses on fixing troubled companies. Elizabeth Burr had been serving as Rite Aid’s temporary chief executive since January.

Rite Aid is one of many drugstore chains dealing with lawsuits stemming from the deadly abuse of opioids in the United States. In March, the Justice Department filed a complaint against Rite Aid and its various subsidiaries asserting that the company filled prescriptions for excessive quantities of opioids “that had obvious, and often multiple, red flags indicating misuse.”

The company has denied these claims.

Rite Aid, which has more than 45,000 employees, has struggled in recent years to compete against larger peers like CVS and Walgreens Boots Alliance, as well as Amazon. Deteriorating sales left the company with less money to invest in its businesses, and more difficultly in paying back its debt. As of June, according to company filings, it had $3.3 billion in debt, not counting the pending opioid litigation.

Rite Aid’s stock has fallen nearly 80 percent since the start of the year.

That array of problems has created “just kind of the perfect storm,” said Sarah Foss, the global head of legal and restructuring at the financial services company Debtwire. “I think Chapter 11 is really the only option for somebody like a Rite Aid to get all of this settled. On a basic level, what bankruptcy does is it allows you to settle it all in one forum.”

Rite Aid has closed several stores in recent months and has been preparing to close hundreds more. The shrinking of the company has made it even harder to compete.

“Because they closed so many stores, if you happen to need something, you might not necessarily have a Rite Aid next to you, so you’re going to go to a competitor,” said Chedly Louis, a vice president at Moody’s Investors Service, who follows Rite Aid. “So that’s another reason why you’ve got weakness.”

Mr. Stein, the company’s new head, said his focus would be to steer the company through the bankruptcy process, when it will be able to trim debt, close some stores and deal with the opioid litigation. Mr. Stein said he hoped to help the chain “reach its full potential as a modern neighborhood pharmacy.”

The bankruptcy filing is a dramatic fall for what was once the biggest drugstore chain in the United States. In 1998, Rite Aid’s market value was nearly $13 billion. It closed on Friday with a market value of less $40 million.

“The company has not been well managed for a very long time,” said David Silverman, a retail analyst at Fitch Ratings. “They have been stuck in the perpetual inability to improve their fortune.”

Rite Aid said on Sunday that it was working on a potential deal to sell Elixir, the pharmacy benefit manager it bought for $2 billion in 2015, to MedImpact. Any deal would be subject to approval by a bankruptcy judge.

Pharmacy benefit management companies, often referred to as P.B.M.s in the industry, act as intermediaries on behalf of employers and health insurance plans, performing services like negotiating discounts on drugs.

Elixir has been a challenge for Rite Aid, because its smaller scale has put it at a disadvantage when negotiating for larger contracts that could generate more cash. CVS Caremark, Cigna’s Express Scripts and UnitedHealth Group’s OptumRx are the three biggest pharmacy benefit managers, processing about 80 percent of all prescription claims in the United States.

“It would have been different if they would have been able to grow that business, grow that P.B.M.,” Ms. Louis said.

In recent years, Rite Aid has been shuttering stores to keep pace with declining sales. It now has about 2,000 locations in 17 states. CVS Pharmacy, on the other hand, has more than 9,500 stores and Walgreens around 8,700.

Rite Aid shrank its store base significantly after a failed merger with Walgreens in 2017. The Federal Trade Commission had antitrust concerns about combining two of the country’s largest drugstore chains. When the merger fell through, Rite Aid agreed to sell to Walgreens more than 2,000 stores — around 48 percent — along with three distribution centers for $5.18 billion. At the time, Rite Aid said it would be left with its best performing locations, and John Standley, who was the chief executive, said the sale of those assets was an “important strategic transformation” for the company.

Mr. Silverman of Fitch said that Rite Aid “generated quite a bit of cash” from the sale and used it to pay down debt. But, he added, “from a competitor standpoint, now they’re even smaller.”

Rite Aid later tried to merge with the grocery chain Albertsons, but the deal was called off in 2018 after it lost support from Rite Aid’s shareholders.

During the pandemic, Rite Aid initially benefited from a sales boom as people stocked up on hand sanitizers and cleaning and beauty products. It sped up technological offerings, opened smaller-format stores aimed at addressing pharmacy needs and said it was focusing on winning over more millennial and Generation X customers. Rite Aid saw its earnings rise and losses narrow.

But as the pandemic wore on, customers started consolidating their trips to drugstores, cutting into Rite Aid’s opportunities to capture impulse purchases. Social distancing protocols led to a less severe cold and flu season during the first winter of the pandemic, resulting in a big drop in the company’s cough, cold and flu business.

“We just didn’t realize how evaporated that business actually would be,” Heyward Donigan, Rite Aid’s chief executive at the time, said in an interview on CNBC in 2021.

As earnings eroded, the debt load became heavier. “It’s all about the cash flow,” Ms. Louis at Moody’s said.

In June, Rite Aid reported revenue of $5.7 billion for its most recent quarter, down from $6 billion a year earlier, driven partly by continued challenges in selling merchandise like food, beauty items and household goods. Consumers are increasingly turning to Amazon, the corner store and elsewhere to buy those goods.

The company began in 1962 as Thrif D Discount Center in Scranton, Pa. The chain changed its name to Rite Aid in 1968 and became a publicly traded company that year. Its founder and chief executive, Alex Grass, helped expand the company and its stores quickly over the next decade, expanding west to Michigan, Ohio and along the Gulf Coast and West Coast. For a time, Rite Aid was the nation’s largest drugstore chain and the largest within New York City.

In the late 1990s and early 2000s, Rite Aid was embroiled in a securities and accounting fraud case. Former Rite Aid executives — including Martin Grass, the son of Rite Aid’s founder and a onetime chief executive — were indicted as part of a securities and accounting fraud that regulators said led to a $1.6 billion restatement of earnings, the largest ever at the time. The company was forced to restate its earnings in 2000.

Elizabeth Burr, the current Rite Aid chief executive, took over after Ms. Donigan abruptly left in January after four years in the role.

Pharmaceutical manufacturers have also filed for bankruptcy amid litigation fights over their role in the opioid crisis. In August, the opioid manufacturer Mallinckrodt Pharmaceuticals filed for bankruptcy for a second time in three years. Last year, it had promised to pay $1.7 billion, but after making one payment and missing a second one this June, it devised a plan with its creditors to cancel a majority of the $1.25 billion that the company still owed under the original settlement agreement. In exchange, Mallinckrodt paid $250 million ahead of its second bankruptcy.