CVS Caremark: Finding its Stride in the PBM Business
CVS Caremark (NYSE:CVS) has been aggressively trying to grow its Pharmacy Benefits Management (PBM) after suffering from some major setbacks in 2009-2010. High profile contracts from CalPERS, Medco Health and Aetna in the past year are helping boost CVS’s outlook in this business. CVS Caremark is an integrated pharmacy services provider and drugstore chain that competes with Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD) in its Prescription Drugs, OTC Drugs and general merchandise segment. It also competes with Medco Health Solutions (NYSE:MHS) and Express Scripts (NASDAQ:ESRX) in its Pharmacy Benefits Management segment.
Major Deals Lift Prospects
CVS Caremark was under pressure over the past few quarters over the credibility of its “integrated business model” of having both the drugstore chains and pharmacy benefits management (PBM) together, especially after losing billions of dollars worth of PBM business in 2009-2010.
However the prospects for this business are improving for CVS given a string of big contract wins in the past year.
Among these CVS Caremark won a 12-year agreement to provide health insurance carrier Aetna with a broad range of PBM services in mid-2010. It will serve 9 million Aetna PBM members and administer approximately $9 billion in annual drug spending. Aetna began shifting to CVS Caremark PBM platforms starting 2011.
In May 2011, CVS Caremark beat Medco Health Solutions to win a 3-year $3 billion contract to provide integrated pharmacy services for the Federal Employee Program (FEP). Effective from 2012, CVS will provide pharmacy services to more than 5 million federal employees, retirees and dependents covered under FEP.
More recently in June 2011, CVS signed a half billion dollar annual contract with CalPERS (California Public Employees’ Retirement System) to provide prescription drug benefits, previously held by Medco Health Solutions. These contracts have succeeded in giving much needed boost to CVS Caremark’s PBM business, easing the concern that the company is losing business to its rivals.
PBM Growth to Continue in 2011-12
Aetna’s contract has led to steep revenue growth of about 20% for CVS Caremark in 2011 (y/y) as claims started to come in. The pharmacy network claims volume increased by 20% and mail choice claims have grown by 13%. With the new FEP contract, PBM revenues should see further revenue growth in 2012, and this could provide upside to our forecasts.
- Higher Medical Costs Likely Weighed On CVS Health’s Q1 Earnings
- Should You Pick CVS Stock At $75 After A 6% Fall This Year?
- Is CVS Health Stock Undervalued At $70?
- Will CVS Health Stock Recover To Its Pre-Inflation Shock Highs of $110?
- Higher Costs To Weigh On CVS Health’s Q2?
- Should You Buy CVS Stock At $70?
Currently we estimate that the PBM business accounts for around 20% of CVS’s value while prescription drugs makes up the majority of its stock value at over 50%. However if the PBM business grows more quickly than we forecast, we could see upside to our forecast.
Drag the trend line above to see the impact on the share price from this segment.