What a restructured Rite Aid could look like

• Rite Aid may find stronger financial footing with an even smaller footprint.
• "It will reemerge leaner and with more serviceable debt," said Peter Bonis, chief medical officer at Wolters Kluwer Health.
• Still, there are important questions about which neighborhoods a slimmed-down company will no longer serve.

The big picture: On Sunday, Rite Aid announced a plan to restructure more than $3 billion in debt and reportedly may close up to 500 of its underperforming stores as part of its bankruptcy plan.

• The company, which now has over 2,100 stores in 17 states, announced a deal that provides $200 million in new financing.
• Rite Aid also indicated it will offload its relatively small pharmacy benefit management company Elixer. PBM firm MedImpact has reportedly offered to buy the company for $575 million, per the Wall Street Journal.

Be smart: Rite Aid is already a fraction of the size of its largest competitors as measured by revenue, locations and workforce. It's also much smaller than it once was after shuttering or selling off dozens of stores in recent years.

• That left it at a major disadvantage while its chief rivals bulked up through major acquisitions and online retailers like Amazon built out their health care offerings.
• At the same time, it's facing challenges that its competitors are also struggling with, like lower earnings as COVID-driven demand dropped off, a squeeze on drug margins from PBMs, competition from online retailers for non-pharmacy sales and shrink due to theft.

Yes, but: Bankruptcy will help Rite Aid cut out some major costs like store leases, said Alessandra Glorioso, a bankruptcy partner at international law firm Dorsey & Whitney.

• The company will reduce its financial risk by unloading a large amount of debt as it cuts back unprofitable stores, Chedly Louis, vice president for Moody's Investors Service, told Axios.
• That should help the company reach a healthier balance sheet with higher earnings and more cash as it dumps debt, Louis said.

What we're watching: Where Rite Aid will close stores — and whether those closures could create pharmacy deserts in rural areas and inner cities, as some experts warn.

• On the flip side, Rite Aid has an opportunity to optimize its footprint and fill gaps in underserved areas where its competitors aren't, Louis said.
• "You have some states where you don't have as many pharmacies, so if they remain in those states that might be helpful, as opposed to urban locations where you have a number of pharmacies at every corner," Louis said.
• The most closures could come in areas where Rite Aid has the greatest density, such as Pennsylvania, California and New York, Bonis said.

Between the lines: Among its financial headwinds are federal, state and other lawsuits alleging the company illegally filled prescriptions for controlled substances, including opioids.

• It joins several other large companies filing for bankruptcy protection following opioid lawsuits including drugmakers Purdue Pharma, Insys Therapeutics and Mallinckrodt, as well as drug distributor Rochester Drug Cooperative, Reuters reported.
• Rite Aid gains some protection from opioid liability claims as bankruptcy courts typically grant an automatic stay of litigation. But some bankruptcy courts have found lawsuits brought by the federal government, such as those brought under the False Claims Act, may not be subject to that protection, Glorioso said.
• "Bankruptcy may not get Rite Aid a breathing spell from the Department of Justice," Glorioso said.