CVS Caremark (NYSE:CVS) second quarter earnings showed impressive results riding on the back of its revitalized Pharmacy Benefits Management (PBM) business. High profile contracts from CalPERS, Aetna and FEP have boosted 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.
We recently wrote an article on the progress made by CVS Caremark’s PBM business over the past year (CVS Caremark: Finding its Stride in the PBM Business). The $9 billion, 12-year agreement with the health insurance carrier Aetna is on its way of driving up a huge jump in its top-line in 2011. Contracts with Aetna and FEP have helped arrest the decline in the number of pharmacy claims and provided a much needed upside to CVS Caremark’s pharmacy benefit management business. As a result, the contribution of the PBM division to stock price has jumped from to near 22% within a year making it growing and valuable division for CVS Caremark.
Starting in 2011, CVS Caremark has started serving 9 million Aetna PBM members and is likely to administer approximately $9 billion in annual drug spending. As a result, its pharmacy revenues have jumped up 20-25% leading to more than 10% growth in total revenues. Network claims processed by CVS have also grown over 30% and mail choice claims have increased by more than 10% over the first half of 2011.
With the new FEP contract in place from 2012, PBM revenues should see further revenue growth next year which has provided further upside to our forecasts.