With Tricare Decision Walgreen’s Loss Is CVS’s Gain… Again

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With TriWest, the western region plan contractor, adding CVS Caremark‘s (NYSE:CVS) MinuteClinic into its network, MinuteClinic is now a provider to the entire Tricare universe which also includes Health Net (North region contractor) and Humana Military (South Region contractor). This gives CVS access to Tricare’s 10 million eligible beneficiaries [1] who will now fill their prescriptions at CVS’s pharmacies as a result of Tricare’s decision to keep Walgreen out of its network. [2] We expect the company to gain significant sales going forward as a result of this.

View our detailed analysis for CVS Caremark

Almost 99% of the 584 retail health care clinics CVS operates under the MinuteClinic brand are located within its pharmacies or stores. They are staffed by nurse practitioners and physician assistants who specialize in family health care and can diagnose, treat and write prescriptions for common illness. Minor wounds, abrasions, skin conditions and joint sprains are also treated as well as common vaccinations such as influenza, tetanus, pneumonia and hepatitis A & B are also available at most locations. We expect most of the visits to these clinics would result in requirements for scheduled drugs, Over The Counter drugs or general merchandise which can be conveniently fulfilled at the pharmacy located right outside the clinic. The implicit convenience should translate into substantial sales for the CVS Pharmacies.

As a result of the arrangement, the company should gain almost 15 million prescriptions that Walgreen filled for Tricare in 2011. [3] This could result in the company sustaining its market share in 2013 instead of the expected drop on account of Express Script customer moving back to Walgreen.

A growth of half of a percentage point in the company’s share of Retail Prescriptions filled in the U.S. from our current forecast would translate into a 2% upside to the company’s fair value. If the company manages to retain the Express Scripts customers it gained from Walgreen through the steep discounts it is currently offering and increases its market share to 20%, it would translate to nearly 10% upside to our current estimate.

We currently have a $48 Trefis price estimate for CVS Caremark stock which is in line with the current market price.

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Notes:
  1. Tricare facts and figures, Tricare, March 2012 []
  2. Walgreen loses key Express Scripts customers, Reuters, September 2012 []
  3. Weak August Sales, Tricare Decision Weigh on Walgreen, Wall Street Journal, September 2012 []