CVS Caremark (NYSE:CVS) is one of the leading retail pharmacies in the U.S. that competes with Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD). Though Walgreen has a wider footprint with the highest number of stores across the country, CVS is the largest retail pharmacy in terms of number of prescription filled in its stores. In 2012, the company earned $43.7 billion as prescription revenues which was slightly higher than that earned by Walgreen ($42.8 billion), which suffered a setback due to its temporary exit from the Express Scripts retail pharmacy network.
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The aging U.S. population and the introduction of the Affordable Care Act, which is set to expand insurance to approximately 30 million Americans, are key trends driving growth in the pharmaceutical industry. Total prescription revenues of U.S. drugstores are expected to reach $350 billion by the end of 2015, growing at 5.3% annually.  With a large national footprint, own pharmacy benefit management arm and in-store clinics to help with basic healthcare needs, we think CVS is well-positioned to leverage the above trends.
CVS’s share of total prescriptions filled in the US has risen from 17.2% in 2009 to 19.1% in 2012. In this article we explain why we think that the company’s market share can continue rising in the future as well.
CVS Is Confident Of Retaining 60% Of Walgreen Customers
On account of Walgreen’s payment dispute with Express Scripts, many Walgreen customers switched over to its competitors last year. Handling prescriptions for millions of people, Express Scripts runs prescription drugs plans for employers, insurers and other customers. CVS’s retail pharmacies gained 6.5 million to 7 million new prescriptions from former Walgreen customers in 2012.  This was the primary reason why the company’s market share in retail prescription filled in the US shot up from 17.8% in 2011 to 19.1% in 2012.
However, Walgreen claims to be winning back old customers after it entered into a fresh agreement with Express Scripts in September 2012, which allows Express customers to fill prescriptions at Walgreen stores. Nevertheless, CVS claims that it is confident in its ability to retain a minimum of 60% of the Walgreen scripts this year. 
CVS Caremark, Walgreen and Express Scripts together account for over 50% of total prescription drugs filled in the US.  If the company manages to retain a majority of new customers acquired last year, we think it will be able to sustain its market share gain in the future as well.
Rising Store Count & Its Easy Accessibility Gives CVS An Edge Over Competitors
CVS has consistently increased its store count in the last few years from 6,245 in 2007 to more than 7,500 at present. Though the number of CVS stores is lower compared to Walgreen(8,585 stores), we believe that the rising store count for CVS will help the company increase its share in total prescriptions filled in the U.S. To ensure that it leverages the expected growth in the number of insured Americans after the Affordable Care Act is fully implemented, CVS plans to open between 100 – 200 new pharmacies per year. 
In addition to the rising store count, CVS is banking on its network of strategically located retail drugstores across the US to better compete with Walgreen and other pharmacies. Approximately 75% of the US population lives within a three mile radius of a CVS store, which is the lower than any other drugstore chains in the US. Walgreen claims to have 75% population within a five mile radius. 
At the recently held Morgan Stanley Healthcare Conference, CVS announced that it has gained share in pharmacy sales so far this year.
MinuteClinic Expansion Can Result In Higher Pharmacy Sales
MinuteClinic are small walk-in medical clinics within the CVS Caremark pharmacy stores. Nurse practitioners and physician assistants at the clinic utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and dispense vaccinations at much lower prices than a hospital.
As 30 million Americans are included under healthcare coverage, it can lead to a shortage of primary care physicians in the future. Expanding the MinuteClinic footprint can help cover the additional demand for physicians. The U.S. is already facing an acute shortage of doctors and this should benefit independent clinics such as MinuteClinic. Aiming to position MinuteClinic as a national primary care provider, CVS plans to open 150 new MinuteClinics by the end of the year and intends to operate about 1,500 clinics by 2017. Around 30% of the expansion will be in new markets.
CVS Caremark’s closest competitor in retail clinic business are Take Care Clinics operated by Walgreen from within its drugstores and similar clinics by Wal-Mart and Target. While Take Care clinics are present at 360 locations and Wal-Mart at about 130, MinuteClinic operates across 684 locations in the U.S. Additionally CVS employs over 26,000 pharmacists, nurse practitioners and physician assistants as compared to 17,000 working at Walgreen.
The integration of its Pharmacy Benefits Management and pharmacy services is one of CVS’s biggest competitive advantage. The wider reach of MinuteClinic stores can lead to prescription transfers from other drugstores because of the inherent convenience of all the services being available at the same location.
Drawback – Walgreen Has a Competitive Advantage Over CVS In Generics
Walgreen recently entered into a 10-year agreement with AmerisourceBergen (ABC) to jointly source generic drugs and generate logistical efficiencies. ABC provides drug distribution and related services designed to reduce costs and improve patient outcomes. By combining its distribution in the United States with ABC, Walgreen will be able to negotiate better prices for generic drugs.
The total generic dispensing rate, which implies the percentage of generic drugs in a consumer’s prescription grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. Though the pace of generic drugs is expected to slow down, an estimated $15 billion worth of branded products will go off patent in the next three years, opening them to competition from generic drugs.  By offering generics at cheaper prices than its competitors, Walgreen can gain a higher proportion of generic drugs sales and thereby increase its market share in total prescriptions filled in the US.
Our price estimate of $63 for CVS Caremark is at a 10% premium to the current market price.Notes:
- New Study Predicts $350 Billion U.S. Pharmacy Industry by 2015, Identifies Risks to Profitability, Pembroke Consulting, July 30, 2013 [↩]
- 2012 Market Share of Top Pharmacies, January 15, 2013, Drug Channels, January 15, 2013 [↩]
- CVS Caremark’s Management Presents at 2013 Morgan Stanley Healthcare Conference (Transcript), Seeking Alpha, September 10, 2013 [↩]
- Retail Pharmacy Stocks, A Good Investment As Affordable Care Act Nears, Seeking Alpha, April 1, 2013 [↩] [↩]
- PLUG-IN AT WALGREENS, Bizmology, April 18, 2012 [↩]
- CVS Caremark’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 6, 2013 [↩]