At a time when Walgreen is struggling with declining sales in the U.S. following the Express Scripts fallout and investor skepticism over European Alliance Boots deal, CVS Caremark (NYSE:CVS) is comfortably reaping the benefit of expanding health care and prescriptions market. It has significantly benefited from the Walgreen-Express fallout on the retail side as well as turned around its fortunes in the pharmacy services business by winning high profile contracts away from rivals to become the second largest PBM and acquiring leadership position in the federally-sponsored Medicare Part D prescription business.
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 Express Scripts-Medco Health Solutions in the pharmacy benefits management segment. Here’s why we value its stock at $47.
Retail Business Strong, Benefited From Express-Walgreen Fallout
We estimate that CVS Caremark’s market share in the retail prescriptions business gradually grew from 15% in 2007 to 18% in 2011 as it filled 660 million prescriptions in 2011, up from 530 million in 2007, through the addition of over 1,000 new retail locations. Going forward, we expect its market share to continue to increase to 19% over our forecast period as it adds stores at new locations and the number of prescriptions filled per store improves.
For the first half of 2012, CVS’s retail business has benefited significantly from over 80 million prescriptions and new customers falling out of the contract impasse between Walgreen and Express Scripts due to significant geographical footprint overlap. Last quarter, its retail segment revenues increased by 10% (y/y), driven by 8.4% higher same store sales and 126 new stores additions. It is now trying to retain these customers counting on the delay in Walgreen and Express Scripts renegotiating a fresh deal, which might make them more sticky.
Pharmacy Services Business Grows
CVS Caremark aggressively expanded its PBM business in 2011 by winning multiple high profile contracts, including CalPERS, Aetna, FEPand Universal American and quickly turned around the company’s outlook for the business. Last quarter, its PBM revenues grew 32% as it processed 17% more mail choice and 26% more pharmacy network claims compared to the prior year period, benefiting from its leading market share in Medicare Part D prescription business as well as high growth in specialty pharmacy. It has also benefited from strong adoption of its Maintenance Choice plans that extend the mail-order benefit for Caremark’s members, enabling them to pick up their maintenance medications at any CVS retail pharmacy with no increase in co-pay or payer pricing.
CVS has also focused on acquiring a leading position in the Medicare Part D business through UAM acquisition and purchase of Health Net’s Medicare PDP business. Medicare and Medicaid are expected to show strong growth over this decade and could account for two-thirds of all U.S. prescriptions by 2020, up from about one-third today. In particular, Medicare Part D prescription drugs plans would get a huge boost from the aging U.S. population and health reforms that are expected to significantly increase prescription utilization and help plug the Medicare Part D coverage gap, or doughnut hole.
We have a $47 price estimate for CVS Caremark stock, 5% ahead of the current market price.