CVS Caremark (NYSE:CVS), the second largest drug retailer in the United States, will announce its Q1 earnings on Wednesday. It completed 2011 with a successful turnaround in its Pharmacy Benefits Management (PBM) business by winning multiple high-profile contracts. It also raised its earnings guidance for this quarter hoping to pick up additional prescription business for its retail segment from Express Scripts customers after the Pharmacy Services Provider parted ways with Walgreen. CVS Caremark is an integrated pharmacy services provider and drugstore chain that competes with Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD) in its prescription drugs, OTC drugs and general merchandise segment. It also competes with Medco Health Solutions and Express Scripts in the pharmacy benefits management segment.
Retail Business Strong, Benefited From Express-Walgreen Fallout
This quarter, the retail prescription business is expected to have further benefited from Walgreen-Express fallout as Express members looked for non-Walgreen pharmacies to fill their prescriptions. Anticipating benefits from the impasse between Walgreen and Express Scripts, the company has an improved earnings guidance for this quarter, with higher prescriptions and operating profits. It is estimated that if the dispute remains unresolved beyond this quarter and throughout the year, CVS, with its strong retail presence and significant geographical footprint overlap with Walgreen stores, could add up to 20 million prescriptions falling out of Walgreen over 2012.
New Contracts and High Client Retention Rates for PBM Segment in 2011
CVS Caremark aggressively expanded its PBM business in 2011, winning multiple high profile contracts, including CalPERS, Aetna, FEP and Universal American and turned around the company’s outlook for the business. CVS also succeeded in retaining more than 98% of the business for 2012 through contract renewals.
The jump in the top-line, however, came at the cost of its margins which fell to 5.6% in 2011, compared to 7% in 2010 and the contract renewals for the current year are likely to have come with further margin compression. Nonetheless, it is expected to be offset over time by strong top-line growth and the company’s PBM streamlining initiative announced last year, which is expected to save more than $1 billion cumulatively through 2015.
We have a $45 price estimate for CVS Caremark, which is about 4% ahead of the current market price.