CVS Caremark (NYSE: CVS), a leading drug retailer in the United States, recently published its annual drug adherence report titled “2013 State Of The States: Adherence Report”. The report focuses on the amount of savings that different states in the U.S. could generate if the medication adherence rates improve. However, the report also provides some insight into the strategy it uses when deciding on store locations and how it assesses future expansion opportunities to generate maximum revenues and earnings.
CVS Caremark uses data provided by its pharmacy benefit management (PBM) business to gauge the medication adherence rates (the percentage of population who adhere to a suggested prescription) and the use of generic drugs across different states in the U.S. The data is further categorized among three different population groups served by its PBM business – private health plans, employer-sponsored plans and Medicare Part D prescription drug plans (PDPs).
The report uses certain metrics of measurement which are defined as below:
- Generic Dispensing Rate (GDR): The percent of prescriptions that were dispensed as generic drugs.
- Overall Percent 90-Day Dispensing: The percent of all prescriptions that were for a supply of 84 to 90 days.
- First Fill Persistency Rate (FFPR): The percent of members who are persistent in refilling their prescriptions after the first fill.
- Overweight and Obese: Percent of adults who reported having a body mass index (BMI) greater than or equal to 25 kg/meters squared.
We will be using the above metrics of measurement in the following analysis to figure out what regions CVS Caremark will likely target for store locations and out further expansion plans.
Generic Dispensing Rate (GDR)
Generics are known to have higher profit margins than their branded counterparts. The patents of a number of branded drugs have recently expired and many more branded drugs will lose their patent protection in the coming years. This has resulted in an increased GDR among all leading drugstore chains like Walgreen (NYSE: WAG), Rite Aid (NYSE: RAD) and CVS Caremark. Higher GDR, on one hand, has resulted in a marginal decline in revenues as they are cheaper than branded drugs while on the other hand they have improved the bottom line of these companies owing to their higher margins.
According to the report, Massachusetts has the highest GDR of 92% among Medicare Part D PDP covered population group. CVS Caremark has promptly identified this opportunity and it already has 352 stores in this state against 179 stores of Walgreen, giving CVS Caremark an edge over its major competitor. However, CVS Caremark has only 55 stores in Minnesota, which has the highest GDR of about 93% among private and employer covered population groups, against 160 stores being operated by Walgreen. We may see CVS Caremark expanding its footprint in Minnesota by opening higher number of stores to compete with Walgreen. 
Overall Percent 90-Day Dispensing
Higher 90-day dispensing percent results in a larger amount of sale occurring by way of bulk purchases. The report states that Maine is the leading state with 74.7% 90-day dispensing rate among private health plan covered population group while Connecticut (55.5%) and Alaska (54.1%) are the leading states under employer sponsored and Medicare covered population groups respectively. 
CVS Caremark already operates 22 and 145 stores in Maine and Connecticut respectively, ahead of Walgreen’s 15 and 119 stores in the respective states. However, Walgreen also operates 5 stores in Alaska where CVS Caremark has none, giving Walgreen a slight advantage over CVS Caremark. We might see CVS Caremark opening new stores in Alaska to keep competition under control, given that the region has good potential for 90-day prescriptions.
First Fill Persistency Rate (FFPR)
FFPR indicates customer stickiness and persistence in getting its prescription refilled from the same drug retailer. A high FFPR results in higher customer retention leading to improved top line. The report indicates that New Jersey has the highest FFPR of 94.2% among Medicare covered population group while Pennsylvania (79.8%) and Vermont (81.1%) are the leading states under private health plans and employer sponsored population groups respectively. 
CVS Caremark operates the maximum number of stores in New Jersey (272 stores) and Pennsylvania (401 stores) while in Vermont it has 4 stores, which is the same as Walgreen. Walgreen operates 205 and 138 stores in New Jersey and Pennsylvania respectively. CVS Caremark has already exploited the opportunity provided by higher FFPR, which is evident from the company’s higher revenues.
Overweight And Obese
It is well known that overweight and obese people are more prone to health conditions and thus require more medications than otherwise healthy people. The report states that West Virginia has 69% of its population diagnosed as obese, closely followed by Mississippi with 68.9% overweight population.  
CVS Caremark operates 49 stores in West Virginia, ahead of Walgreen’s 22 stores. However, Walgreen is ahead in Mississippi as it operates 71 stores against 48 stores of CVS Caremark. We may see CVS Caremark catch up in terms of store count in Mississippi in the coming years.
We currently have a $64.42 Trefis price estimate for CVS Caremark, about 10% higher than its current market price.Notes: