CVS To Benefit From Strong PBM Performance & Increasing MinuteClinic Footprint In Q2’14
CVS Caremark (NYSE:CVS), the second largest drugstore chain in the U.S. after Walgreen, has been reporting strong growth over the last two years. After a slight decline in revenues in Q1 2013 and only marginal growth in Q2 2013, the company witnessed robust growth in Q3 2013 (5.8% annual growth), Q4 2013 (4.6% annual growth) and Q1 2014 (6.3% annual growth), each quarter driven by strong performance in the Pharmacy Services segment (which CVS refers to as PBM). CVS is set to report its Q2 2014 earnings on August 5, and we expect the company to retain its growth momentum in the quarter. CVS hsd guided that its PBM business and retail segment revenues will grow, respectively, between 10.8% to 12.0% and 2.5% to 4.o% year over year.
CVS remains committed to its goal to create a national primary care platform that provides integrated high quality care that is convenient, accessible and affordable. With its Pharmacy Services Segment (PBM) and in-store clinics to help with basic healthcare needs, CVS’ management remains confident that the company can gain market share across its offerings.
Our price estimate of $70 for CVS Caremark is at a discount of approximately 10% to the current market price. We will update our valuation after the Q2 2014 earnings release.
View our detailed analysis for CVS Caremark
The PBM Business Remains A Key Growth Driver
CVS is the only retail drugstore chain that has its own Services arm (PBM), which allows it to offer scale to its retail clients. The company maintains a national network of over 67,000 retail pharmacies that serve customers covered under the programs administered by Caremark. In addition to this, it also designs customized pharmacy service plans for its clients, helping them to minimize costs.
CVS has a 30% market share in the managed Medicaid market and believes it is well-positioned to gain additional share through Medicaid expansion. The company estimates the managed Medicaid market will grow by 40% through 2016. [1] CVS claims that its health plan client footprint spans 25 states covering approximately 70% of the eligible exchange population. [1] The company ranked first (among large publicly traded PBMs) on overall satisfaction in the annual pharmacy benefit manager customer satisfaction report released by PBMI in April 2014. The report is a broad survey which includes the opinions of nearly 400 plans sponsors who represent approximately 65 million members.
During Q1 2014, CVS announced the renewal of a three-year contract to provide integrated pharmacy benefit services for the federal employee health benefit program (FEP). CVS provides mail, retail and specialty PBM services along with highly customized clinical programs to FEP’s more than 5 million federal employees, retirees and dependents.
An Expanding MinuteClinic Footprint Will Benefit CVS
MinuteClinics are small walk-in retail health clinics within the CVS Caremark pharmacy stores that 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. It is usually staffed with advanced degree nurses known as nurse practitioners who treat routine maladies.
CVS, which accounts for more than one in every five prescriptions filled in the U.S., considers MinuteCinics to be an important factor responsible for its retail and enterprise growth. [2] CVS registered a 11.4% year-over-year increase in revenue from MinuteClinics in Q1 2014. Currently, the company has over 800 MinuteClinic locations inside CVS/pharmacy stores in 28 states and the District of Columbia.
The U.S. is currently facing an acute shortage of primary care physicians. With 30 million additional Americans expected to be included under healthcare coverage (as a result of the Affordable Care Act), the demand is expected to outweigh the supply by about 45,000 doctors by the end of this decade. [2] Expanding the MinuteClinic footprint can help CVS take advantage of this huge demand-supply gap.
As per a recent report by Merchant Medicine, CVS has a considerable lead with more than double the number of retail clinics compared to its closest competitor Walgreen. And t continues to open clinics at a much faster pace than its competitors. CVS plans to open a total of 150 new MinuteClinics by the end of the year and operate 1,500 clinics by 2017. ((Read: Why CVS Will Benefit From An Expanding MinuteClinic Footprint)
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Notes:- CVS Caremark’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 5, 2013 [↩] [↩]
- CVS Caremark’s CEO Presents at UBS Global Healthcare Conference (Transcript), Seeking Alpha, May 20, 2014 [↩] [↩]