Watch For Walgreen-Express Scripts Impact In CVS Caremark Earnings

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CVS Caremark (NYSE:CVS), the second largest drug retailer in the United States, will announce its Q3 earnings on Tuesday, November 6. It raised its earnings guidance for this fiscal year in August, hoping to build on additional prescription business for its retail segment from Express Scripts-Walgreen impasse. We will watch for the company’s strategy to retain customers from Express Scripts with the dispute between the PBM (Pharmacy Benefits Manager) and Walgreen now resolved.

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 and with Medco Health Solutions & Express Scripts in the pharmacy benefits management segment.

View our detailed analysis for CVS Caremark

Retail Business Benefiting From Express-Walgreen Fallout

During the first half of the year, CVS significantly benefited from the Walgreen-Express fallout and its retail pharmacy revenues increasing 8% (y/y), driven by 7% higher same store sales and 115 net new stores additions. With Express Scripts and Walgreen reaching an agreement early in Q3, we will look for the impact of the news on the same store prescriptions filled and retail revenues. The company expects to retain around 50% of the customers it gained as a result of the impasse and launched an aggressive discounts program for customers who sign up for its loyalty program. We will look for insights into the company’s future plans to attract and retain customers from Walgreen.

Generics Impact On Gross Margins

The generics command higher margins of around 18% compared to around 2% for branded drugs [1] and have significant impact on the overall gross margins. The generic dispensing rate has been consistently increasing over the past year. For the retail pharmacy segment, it increased from 75.4% in 2011 to 78.6% in the first half of 2012. The figure was at 79.1% in the end of Q2. For the pharmacy services segment, it increased from 74% to 77%. We would look for the growth in generic dispensation rates during the quarter and the company’s expectations of where the metric would head to in the coming quarters.

Robust Pharmacy Services Business

The Pharmacy services segment also performed well in the first six months with 30% growth in revenue (y/y) as it processed 16% more mail choice and 20% more pharmacy network claims. With Pharmacy network claims constituting almost 69% of revenues earned from pharmacy segment segment, we will look for insights into the ongoing investigations regarding the company pharmacy filling practices which could jeopardize its relationship with Medicare. [2]

We have a $48 Trefis price estimate for CVS Caremark.

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Notes:
  1. Prescription for success, Barron’s, June 2012 []
  2. CVS Caremark prescription refills under scrutiny, source says, LA Times, October 2012 []
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