CVS has high hopes for new 'pharmacy home' plan

A study finds patients using a single pharmacy are more likely to connect with pharmacists.

By Zacks.com Mar 8, 2012 2:49PM

Image: Pills (© Digital Vision Ltd./SuperStock/SuperStock)By Zacks Equity Research
     

Recently, CVS Caremark (CVS) joined Harvard University and Brigham and Women's Hospital in an extensive study on health policy. 


They came up with some new ways to save money while being treated. One of their findings was 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 pharmacists on a regular basis. The researchers consider this twice as effective as taking prescribed medications and estimate it would reduce health care costs by thousands of dollars annually. The data were more applicable to patients older than 65, who take two to three times more prescription medications than younger patients.


About 10,000 people per day are expected to enter this age group in the U.S. in the next eight years. As a result, CVS' "pharmacy home" concept 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 2012 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 Jan. 10, 2012).


The company also won some new accounts, which led to an increase in estimates for the number of new Medicare Part D subscribers for 2012 to 200,000, thus bringing the company's Medicare Part D prescription drug plans (PDP) up to approximately 3.6 million subscribers 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 pressures. Gross margins during the fourth quarter of fiscal 2011 decreased 258 basis points (bps) year-over-year to 19.6%. Moreover, operating margins 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 U.S. drug benefit managers and create a dominant player in the pharmacy benefit management 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 compete 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 No. 2 Rank ("buy"). Over the long term, we have a "neutral" recommendation for the stock.

 

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