CVS Health Corp.'s New Prescription for Growth

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You and I know that we should pick up our prescriptions and take them as ordered after a doctor visit. But do we?

Two out of three Americans don't, according to Quest Diagnostics, which analyzed 76,000 patients last year. A Wall Street J'ournal report on the Quest study showed that two out of five people either didn't pick up their prescribed drugs, skipped doses, or even diverted drugs to the black market. The other individuals were taking medications that weren't prescribed.

The medical lexicon has a special term for it -- "patient noncompliance" -- and it's a big problem. Refusing to take medication or adverse drug interactions leads to 1.9 million life-threatening or fatal events just among Medicare enrollees each year.  

Improving medication adherence is anything but easy, and pharmacies have typically played a backup role. But CVS Health is changing that, taking the lead and teaming up with hospitals and doctors in a series of new programs aimed at getting consumers to start taking their meds.

E-Prescriptions and doctor outreach
Starting next month, Maryland-based MedStar hospitals will become the 41st health system to join forces with CVS. The two entities will collaborate on multiple aspects of patient care, including programs targeted at medication compliance.

Records from CVS pharmacies and the chain's Minute Clinics will be integrated with electronic medical records from MedStar Health's 10 hospitals and 4,000 doctors. With this alliance, doctors will be able to see if patients have picked up their prescriptions. If patients are no-shows, the doctor's office can respond with a phone outreach.

Drug interactions reduced
A main goal of the new program is to keep chronically ill patients out of the hospital, a priority now that penalties for hospital readmissions in place. The program should also drum up new prescription sales for CVS, but the specific financial benefit from this move is currently unclear.

What is clear is that with an electronic medical record available, CVS pharmacists can spot more potential drug interactions. The United States wasted $317.4 billion last year in treating unnecessary medication complications that could have been avoided if patients with better monitoring of drugs and medication compliance, according to an infographic by Express Scripts.

Expansion in walk-in clinics
Retail clinics are playing a growing role in healthcare. Currently, there are over 1,600 walk-in medical clinics in drug and big-box stores like CVS, Walgreens, Wal-Mart, Target, and Kroger. The number is projected to double in the next three years, due in part to the increased demand of newly insured patients under the Affordable Care Act, according to a report from Accenture, a global management consulting firm.

CVS is the market leader; it has approximately 900 walk-in clinics. By 2017, CVS plans to be in 1,500 locations, as well as expand services offered by the clinics. By contrast, Walgreens has made no projections of growth for its healthcare clinics.

Retail clinics have generated a lot of controversy. Provider groups, such as the American Medical Association, have raised concerns about the lost opportunities for preventive care, and the disruption of existing patient-physician relationships. Some even see the move of medicine to the corner store as a war against American doctors, setting up a Walmartized form of healthcare, with production chain clinics right next to the junk food aisles.

While there is certainly huge potential in the millions of newly insured Americans under health reform looking for inexpensive primary care, it seems unlikely people will actually believe they can replace their doctor with a walk-in experience for more than routine care.

More research is needed on the characteristics of clinic users, but a Rand Corporation report shows that 39% said they did not have a primary care physician, compared with 80% of patients nationally who reported a usual source of care.

Where CVS goes from here
CVS Health's move to wipe its stores clean of all tobacco products will probably cost the company $2 billion in annual revenue. And while the drugstore is determined to replace that with multiple new healthcare initiatives, its first quarter was unimpressive. Last quarter was a different story. The company beat on both earnings and revenues, and guided upward. Adjusted earnings per share stood at $1.13, up a significant 16.5% year over year. Net revenue improved 10.7% year over year to $34.6 billion.

CVS is the only drugstore chain that owns a pharmacy benefits business -- Caremark -- which allows it to capture more spending on drugs through its specialty pharmacy mail order and retail store business, and going forward is expected to be a key driver of continued growth. It reported an expansion of 34 basis points year over year to 5.5% gross margin.

Other growth drivers include increased revenue from Minute Clinics and the growth of generic drug sales. Notably, CVS's generic dispensing rate, (the proportion of all generic prescriptions to total number of prescriptions dispensed) jumped 180 bps to 82.4% in the pharmacy services sector last quarter, and soared 160 basis points to 83% in the retail pharmacy sector.

While front-end, same-store sales were affected by tobacco (down 0.4%), as today's healthcare market continues to evolve, bolstering its ties with hospitals and clinics should be a plus.

Clearly, the days when the pharmacist behind the counter was just a quiet guy or gal we treated as a vending machine are rapidly fading. And whether or not CVS's succeeds with its multiple new initiatives, that's a good prescription for the nation's health.

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Cheryl Swanson has no position in any stocks mentioned. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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