CVS' New "Pharmacy Home" Plan - Analyst Blog
08 March 2012 - 9:45PM
Zacks
Recently, CVS Caremark (CVS) along with Harvard
University and Brigham and Women's Hospital, conducted an extensive
research on health policy and came up with some new ways to save
more money while being treated. Through the study, they pointed out
the importance of a single ‘pharmacy home’ for pharmacy
customers.
According to the research data, patients using a single pharmacy
are more likely to connect with their own pharmacists on a regular
basis. The researchers consider this twice as effective as taking
prescribed medications and this will automatically reduce health
care costs by thousands of dollars annually. This is more
applicable to patients aging over 65 years who take two to three
times more prescription medications than others.
Around 10,000 people per day are expected to enter into the 65
years age group in the U.S. in the next 8 years. As a result, down
the line, this ‘pharmacy home’ concept of CVS is expected to gain
more importance.
CVS is gradually gearing up its performance in the field of
Pharmacy Services. After a sluggish phase in fiscal 2010, the
company exhibited improved performance in this segment throughout
2011 and has started off the 2012 selling season on a positive
note.
With 90% of the contract renewals scheduled for 2012 already
complete at the end of fiscal 2011, CVS’ retention rate was as high
as 98%. New business wins stood at an encouraging level of $7.2
billion (significantly up from the $6.8 billion provided on Analyst
Day on January 10, 2012).
The company also won some new accounts, which led to an increase
in estimates for the number of new Medicare Part D lives for 2012
to 200,000 lives, thus bringing the company’s Medicare Part D
prescription drug plans (PDP) lives up to approximately 3.6 million
as of February 2012. The company also expects another $5.5 billion
in new business wins associated with the PDP acquired from
Universal American in 2011 and Universal American's Medicare
Advantage plan.
However, despite implementing diverse strategies to expand its
business, CVS continues to face margin pressure. Gross margin
during the fourth quarter of fiscal 2011 decreased 258 basis points
(bps) year over year to 19.6%. Moreover, operating margin
contracted 60 bps to 6.9%.
In addition, the proposed merger between Express
Scripts (ESRX) and Medco (MHS) is
expected to further challenge CVS in the Pharmacy Services segment.
The deal is expected to combine two of the three largest US drug
benefit managers and create a dominant player in the PBM space that
will cover more than 150 million prescription drug consumers and
50% of the large employer market.
Together with CVS, they are expected to cover approximately 240
million prescription drug consumers. Consequently, post-merger,
even CVS would not be able to stand in competition with the
combined entity. We expect the merger to create market
concentration in the entire economy, leading to an anti-competitive
landscape for CVS.
CVS currently retains a short-term Zacks #2 Rank (Buy). Over the
long term, we have a Neutral recommendation in the stock.
CVS CAREMARK CP (CVS): Free Stock Analysis Report
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