Specialty Drugs To Drive CVS’ Pharmacy Service Business

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A new report released by CVS Caremark (NYSE:CVS) this month projects the specialty drugs spend to more than quadruple by 2020, crossing $400 billion a year. Specialty drugs treat complex diseases such as multiple sclerosis, rheumatoid arthritis, hepatitis C and cancer among others.

Within its pharmacy service management business, which accounts for approximately 60% of its total revenue and 30% of its valuation, specialty drugs are one of CVS Caremark’s top priorities and the company is increasing its focus on developing this business. CVS witnessed strong growth in its specialty business in Q3 2013, with 22% higher revenues compared to the prior year quarter. Key drivers here were drug price inflation, utilization, product launches and new PBM clients. (Read: CVS Earnings Supported By Strong PBM Performance)

As of June 2013, CVS operated 30 retail specialty pharmacy stores (under the CarePlusCVS/pharmacy name) and 12 specialty mail order pharmacies located in 22 states in the U.S., Puerto Rico and the District of Columbia. CVS is the second largest drugstore chain in the U.S. after Walgreens, and we believe it is well equipped to leverage growth in the healthcare market. It remains committed to its goal to create a national primary care platform that provides integrated high quality care that is convenient, accessible and affordable.

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Our price estimate of $65 for CVS Caremark is almost in line with the current market price.

View our detailed analysis for CVS Caremark

Specialty Drugs Is A Complex Market; CVS’ Speciality Offering Improves Cost Savings For Clients

While the basic trends driving the specialty segment are the same as the traditional drug market – price, mix and utilization level – the former is more complex and costly to manage. Although less than 4% of patients use specialty medications, they account for 25% of health care costs. [1] Despite the high cost, specialty drugs represent a rapidly growing area of spending in health care.

CVS claims that one area of both employer and health plan client concern is managing their specialty spend through both pharmacy and medical benefit programs. It offers clients management techniques to help capture and control spending billed under the medical benefit. [1] Costs for both the drug and its administration can vary by thousands of dollars depending on where the patient receives the infusion.  CVS Caremark offers programs that can help payers increase the utilization of more cost-effective sites of care for infused therapies.

In addition to managing specialty cost per client, clients are also concerned about the changes resulting from the Affordable Care Act, which results in a significant amount of new coverage for people who have previously been uninsured.

CVS Caremark has an approximate 15% market share in specialty drugs. The company believes that its differentiated approach to specialty pharmaceuticals will drive lower overall costs while improving health and providing value for both payers and patients. It has an entire suite of specialty capabilities including utilization management programs, specialty guideline management, formulary strategies, as well as a site care and medical claims added in products.

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Notes:
  1. New CVS Caremark Report Projects Annual Specialty Drug Spending Will Quadruple To $402 Billion By 2020, CVS Press Release, November 20, 2013 [] []