CVS Caremark (NYSE:CVS) announced its fiscal year 2012 results on February 6 and reported sales growth of 5% y-o-y. The company posted revenue increases in both prescription drugs and pharmacy benefits businesses as it benefited from new customers won from rivals and the impact of a severe flu season. CVS also raised its 2013 earnings outlook.
Revenues from the pharmacy services business grew by 25% on the addition of large clients like home improvement retailer Lowe’s. This helped the company mitigate the negative impact from the introduction of generic drugs. Revenues from retail prescription grew about 7% this year as additional business from Express Scripts prescriptions gained from the Walgreen-Express Scripts dispute offset the effects of generic entry. The number of prescriptions filled grew 9% over the year.
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.
Strong pharmacy benefits segment growth
The Pharmacy Benefits segment performed well through the year with 25% growth in revenue (y/y) as it processed 16% more mail choice and 14% more pharmacy network claims. The increase in mail choice claim volume was due to a significant number of new client starts in 2012 as well as increased claims associated with its Maintenance Choice program. The increase in the pharmacy network claim volume was driven by new client starts as well as higher claims activity associated with its Medicare Part D program. Revenue per mail choice claim increased by 23% compared to the prior year period primarily due to drug cost inflation in the specialty business. The average revenue per pharmacy network claim processed increased about 3% compared to the year ago period mainly on drug cost inflation partially offset by increases in the generic dispensing rate which increased to 78.5%.
Recently, the Centers for Medicare and Medicaid Services (CMS) sanctioned CVS’s SilverScript Medicare Part D prescription drug plan for issues related to claims processing. Due to this, CVS cannot enroll new individual Silverscript members or market the Silver Script plan to potential individual members while the sanctions are in force. This can severely limit the growth potential of the pharmacy services business in the near term. ((CVS Caremark: CMS Sanctions SilverScript Plan for Claims Processing Issues, Wall Street Journal, January 2013)) With generics dragging down retail pharmacy revenues, we expect pharmacy services to become the primary business of the company over the coming quarters.
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Retail Business Benefits From Walgreen-Express Scripts Dispute And The Flu Season
CVS’s retail sales continued to benefit from prescriptions associated with the Walgreen-Express fallout. Sales rose about 7.5% (y/y) as the number of prescriptions filled increased 9% to about 718 million dollars. As of December, the company has successfully retained about 60% of prescriptions it gained from the dispute.
The company now operates 7,458 stores across the United States which gives it a footprint close to that of its nearest competitor and market leader Walgreen. We expect the company to keep on adding new stores over the year as it seeks to displace Walgreen as the market leader in the drugstore business. The company also noted that the negative impact of the generics increased quarter over quarter to about 1,100 basis points on pharmacy comps from about 900 basis points in the third quarter, which was mitigated by an increase in flu-related scripts and flu shots during December.
Walgreen started filling prescriptions for Express Scripts customers from September 15 and has since seen the prescription counts improve. In January 2013, the company reported a 13.6% increase in January.  Walgreen’s success in turning around the decline in prescription count leads us to believe that CVS may not be able to maintain the 60% retention target till the end of 2013. Therefore we expect the company’s market share in retail prescriptions filled annually in the U.S. to decline in 2013.
We are revising our $49 Trefis price estimate for CVS Caremark.Notes: