CVS Caremark (NYSE:CVS) will unveil its latest earnings on Tuesday, August 7, 2012. Last quarter, it posted strong double digit growth in retail as well as PBM segments benefiting from the Walgreen-Express Scripts impasse and revenue growth from major contract wins/renewals in the PBM business this year. The trends are expected to continue this quarter as well. 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 prescription drugs, OTC drugs and general merchandise. It also competes with Express Scripts, Argus, etc., in the pharmacy benefits management segment.
Retail Business Benefiting From Express-Walgreen Fallout
During Q1, CVS significantly benefited from the Walgreen-Express fallout and its retail segment revenues increased 10% (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.
In July, it raised its 2012 earnings guidance to include the continued benefit of Walgreen-Express impasse during the third quarter after Walgreen hammered out a fresh deal with Express Scripts. Walgreen will restart filling prescriptions for Express Scripts customers from September 15. The previous guidance only reflected the estimated benefit from the stalemate continuing through the end of the second quarter. Had Walgreen-Express not reconciled, CVS could have picked up to 20 million of those transferred scripts till the year-end. Nonetheless, CVS is trying to retain a good number of the transferred customers through its value-added and integrated services like Maintenance Choice and Pharmacy Advisor.
Robust Pharmacy Services Business
The Pharmacy services segment also performed well last quarter with 32% growth in revenue (y/y) as it processed 17% more mail choice and 26% more pharmacy network claims. It also earned 11% higher average revenue per mail choice claim and 7% higher for pharmacy network claim due to drug cost inflation, particularly in specialty drugs.
This year, CVS boasts of $7.1 billion in new contracts with $5.5 billion in incremental revenues from the Universal American contracts with an impressive 98% retention rate. With expanded presence in the Medicare Part D plans, the business is set to see strong growth over the next few years. Medicare Part D covers prescription needs of the aging of “baby boomers” who are now in their 50s and 60s and consume more prescriptions. However, the impressive top-line growth and contract wins/renewals have come with some margin contraction due to competitive client pricing.