CVS Caremark: Finding Its Stride in Pharmacy Benefits Management
CVS Caremark has been aggressively trying to grow its pharmacy-benefits-management business after suffering from some major setbacks in 2009-2010. High-profile contracts from CalPERS, Medco Health and Aetna in the past year are helping boost CVS's outlook in this business, which processes and pays prescription-drug insurance claims.
CVS Caremark is a pharmacy and drugstore chain that competes with Walgreen, Wal-Mart and Rite-Aid in its prescription drugs, over-the-counter drugs and general merchandise segments. It also competes with Medco Health Solutions and Express Scripts in its Pharmacy Benefits Management segment.
Major Deals Lift Prospects
In the last few quarters, CVS Caremark has been under pressure over the credibility of its "integrated business model" of having both the drugstore chains and pharmacy benefits management, especially after losing billions of dollars worth of PBM business in 2009-2010.
However, the prospects for this business are improving for CVS after the company won a string of big contracts in the past year.
Among these, it won a 12-year agreement to provide health-insurance carrier Aetna with a broad range of PBM services in mid-2010. It will serve 9 million Aetna PBM members and administer approximately $9 billion in annual drug spending. Aetna began shifting to CVS Caremark PBM platforms starting 2011.
In May, CVS Caremark beat Medco Health Solutions for a $3 billion, three-year contract to provide pharmacy services for its Federal Employee Program, also known as FEP. Starting next year, CVS will provide pharmacy services to more than 5 million federal employees, retirees and dependents covered under the program.
And in June, CVS signed a half billion dollar annual contract with the California Public Employees' Retirement System to provide prescription drug benefits, previously held by Medco Health Solutions. These contracts have succeeded in giving CVS Caremark's PBM business a much-needed boost and easing concern that the company is losing business to its rivals.
PBM Growth to Continue in 2011-12
As claims from the Aetna contract have started to come in, CVS has grown revenue approximately 20%, year over year. The pharmacy network claims its volume has increased by 20%, while mail-choice claims have grown by 13%. With the new FEP contract, the PBM revenues should see further revenue growth in 2012, and this could increase our forecasts.
We currently estimate that the PBM business accounts for around 20% of CVS's stock value, while prescription drugs makes up more than 50%. However, if the PBM business grows more quickly than we forecast, that could change.
Drag the trend line above to see the PBM's impact on the share price.
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