CVS Caremark’s PBM Business Supports Growth & $45 Value

by Trefis Team
CVS Health
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CVS Caremark (NYSE:CVS) third quarter earnings continued its impressive run in its revitalized Pharmacy Benefits Management (PBM) segment. High profile contracts from CalPERS, Aetna, FEP and Universal American this year have helped arrest the decline in the number of pharmacy claims, providing much needed upside to CVS Caremark’s pharmacy benefit management 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.

PBM Strong Despite Some Margin Compression

Revenues in the Pharmacy Services segment increased 26%, primarily driven by the Aetna contract as well as new activity resulting from its acquisition of the Medicare prescription drug business of Universal American (worth $5.5 billion annually) in 2Q 2011. As a result, pharmacy network claims processed in 3Q increased 40% and mail choice claims processed increased 8%. Also, with nearly 70% of the contract scheduled for renewal for 2012 completed, CVS Caremark disclosed that its PBM business retention rate stood at an impressive 98%. Even though contract renewals came with margin compression, it is expected to be offset over time by the strong top line growth.

Major Deals Lift Prospects

After having suffered some major setbacks in 2009-2010 like the exit of Walgreens from its network with billions of dollars worth of business, CVS Caremark’s PBM business has made huge progress over the past year, having won several high profile contracts from CalPERS, Medco Health and Aetna (Read our article 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. With the new FEP and Universal American contracts in place from 2012, PBM revenues should see further revenue growth next year which has provided further upside to our forecasts.

We have a $45 price estimate for CVS Caremark, which is about 20% ahead of the current market price.

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