CVS Caremark Raises Outlook On Continued Walgreen-Express Impasse

CVS Caremark (NYSE:CVS), the second largest drug retailer in the United States, has significantly benefited from the Walgreen-Express fallout as Express members looked for non-Walgreen pharmacies to fill their prescriptions and many ended up on CVS stores as the most convenient alternative. If the dispute remains unresolved for much longer, those new customers might turn more loyal to CVS, which is already well positioned to attract customers with its integrated and convenient retail-pharmacy services business model. Anticipating further benefits from the continued impasse, the company has further improved its full year earnings guidance, with higher prescriptions and operating profits.

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.

View our detailed analysis for CVS Caremark

Retail Business Strong, Benefited From Express-Walgreen Fallout

This quarter, CVS’s retail business benefited significantly from millions of prescriptions and new customers falling out of the contract impasse between Walgreen and Express Scripts. It now hopes to retain these customers as they continue to frequent CVS drugstores and counts on the delay in Walgreen and Express Scripts renegotiating a fresh deal, which might make them more sticky. CVS has a strong retail presence and significant geographical footprint overlap with Walgreen stores and is the strongest contender to divert a large part of the close to 80 million prescriptions that are likely to fall out of Walgreen this year, towards its stores if the impasse continues.

CVS has also been benefiting from expanded Medicare Part D business, that is likely to show strong growth this decade with the aging of “baby boomers” who are now in their 50s and 60s and would  consume more and more prescriptions.

Gaining impressively from the Walgreen-Express contractual impasse, CVS’s retail segment revenues increased by 10% last quarter (y/y), driven by 8.4% higher same store sales and 126 new stores additions. Gross margins also improved slightly, driven by same store sales increases and higher generic dispensing rates. However, continued reimbursement pressure has been preventing drug retailers like CVS from reaping full margin benefits from new generic introductions.

We are in the process of revising our $45 price estimate for CVS Caremark stock.

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