Generic Drugs Boost CVS Caremark’s Earnings; $57 Fair Value

by Trefis Team
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CVS Caremark
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CVS Caremark (NYSE:CVS) is one of the leading specialty drug retailer and pharmacy benefit management (PBM) company in the United States. The company reported a better than expected first quarter earnings on May 1 as the gross profits increased by 12.5% year-on-year to reach $5.6 billion. Net revenues were marginally lower at $30.7 billion or 0.1% as compared to same period previous year as they were negatively impacted by increased generic sales and dispensing rates for both the Pharmacy Services and Retail Pharmacy segments. CVS Caremark is the largest drug retailer in the US with 7531 stores operating across 42 states, the District of Columbia, Puerto Rico and Brazil and operating primarily under the CVS/pharmacy®, Longs Drugs®, or Drogaria Onofre® names.

As estimated in our previous analysis, the gross profit increased by $469 million for three months ended March 31, 2013 as the generic dispensing rates inched higher to 75.4% and 81% for the mail choice and pharmacy network claims from 69% and 77.3% respectively. The generic dispensing rate denotes the proportion of low-priced generics in a patient’s prescription.

View our detailed analysis for CVS Caremark

Top line remains stable as low priced generics outweigh the increased volumes

The company reported a marginal revenue decline as increased generic sales and dispensing rates offset growth due to increased volumes and higher prices of specialty drugs. The overall revenues were also impacted by the presence of an extra day last year since it was a leap year. Pharmacy same store sales declined by 2.3% year-on-year affected by the lack of significant new brand name drug introductions and lower consumer co-payments and co-insurance arrangements.

Front store sales rose by 1.4% over the previous year period due to higher sales of flu and cold related products, owing to a flu-prone season this year. The occurrence of Easter during March this year also lifted the front store sales revenues.

Pharmacy services segment’s gross margin boosts bottom line

Gross profit from the pharmacy services increased by 24.6% to $768 million and supported the company’s bottom line. This increase is primarily due to the higher generic dispensing rate partially offset by the pressure on margins to retain existing clients and obtain new business. The pharmacy services segment also witnessed a growth as both the number of mail choice claims processed, and the average revenue per mail choice claim increased by 0.6% and 2.9% over the previous year. Pharmacy network claims processed grew by 4.3% to $207.1 million claims in three months due to the increase in number of claims under the Medicare Part D program.

We have updated the Trefis price estimate to $57 from $53 after incorporating the latest earnings update.

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