CVS Cashes In On Pharmacy Services Growth

by Trefis Team
CVS Health
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CVS Caremark (NYSE:CVS) announced its third-quarter results Tuesday and reported that is earnings grew 16 percent. The drugstore operator and pharmacy benefits manager posted revenue increases in both businesses, benefiting from new customers won from rivals, and also raised its full-year earnings outlook. Revenues jumped 13% to $30 billion. The company now expects to keep at least 60% of the new clients gained from the impasse in the fourth quarter above the original projection of at least 50%.

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 prescription drugs, OTC drugs and general merchandise. It also competes with Express Scripts, Argus, etc., in the pharmacy benefits management segment.

View our detailed analysis for CVS Caremark

Benefits from the Walgreen-Express Scripts dispute

CVS’s retail sales continued to benefit from prescriptions associated with the Walgreen-Express fallout. Sales rose 5.5% (y/y) with 4.3% higher same store sales that included 5.3% increase in pharmacy same store sales. It added 42 net new stores during the quarter.

Pharmacy revenues continue to be negatively impacted by the conversion of brand name drugs to equivalent generic drugs, which typically have a lower selling price. The company estimates a negative 905 basis point impact on pharmacy same store sales because of generic introductions. Pharmacy revenues continued to benefit from the Medicare Part D prescription drug program and favorable industry trends as the average American population ages.

Walgreen started filling prescriptions for Express Scripts customers from September 15, and yet reported that its prescriptions filled count fell in the month of October. Though it is still early, it could signal CVS’s success in retaining a major chunk of the customers it gained because of the dispute.

Strong pharmacy benefits segment growth

The Pharmacy Benefits segment also performed well during the quarter with 22% growth in revenue (y/y) as it processed 16.5% more mail choice and 10% more pharmacy network claims. The increase in mail choice claim volume was primarily due to a significant number of new client starts in 2012 as well as increased claims associated with its Maintenance Choice program. The increase in the pharmacy network claim volume was driven by new client starts as well as higher claims activity associated with its Medicare Part D program.

The revenue per mail choice claim increased by 3%, compared to the prior year period. This increase was primarily due to drug cost inflation in the specialty business. The average revenue per pharmacy network claim processed increased 12.4%, as compared to the prior year period, primarily due to drug cost inflation partially offset by increases in the generic dispensing rate which increased to 80%.

In the nine month period for the fiscal year, the Pharmacy Benefits segments has seen net revenues increase 27.4% to $54.8 billion. The increase in net revenues was primarily due to the acquisition of the UAM Medicare PDP Business completed at the end of April 2011, 2012 new client starts and drug cost inflation. With generics dragging down retail pharmacy revenues, we expect the business segment to evolve into the primary business for the company over the coming quarters.

We currently have a $48 Trefis price estimate for CVS Caremark stock which is being revised.

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