Cashing In on the Cat-Fight & Betting on Generics
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The ongoing cat fight between the two major pharma companies Express Scripts Holding Company and Walgreen Co. has actually benefitted CVS Caremark Corporation (NYSE: CVS). The dispute resulted in the company's market share increasing to 60% from 50% earlier, and further boosted its 3Q 2012 net income which was reported as $1.01 billion compared to $868 million in 2011. The dispute within the pharmacy segment has boosted its front end sales too. Talking about CVS's efforts, the company also introduced loyalty/reward programs and health clinics inside the stores. CVS is a leading Pharmacy Benefit Manager and right now it operates nearly 7400 CVS and pharmacy stores with more than 60 million members.
CVS has taken a huge advantage of its competitor’s dispute in terms of its retail sales growth. But now both the warring companies seem to be on track and making efforts to retain their lost customers. Walgreen is making tie ups with Medicare, launching new programs and making hefty investments in advertising. While Express Scripts’s previously made acquisition of Medco Health Solution is now paying off and giving it a dominant position in the market. Let’s discuss these companies’ performance one by one.
After the settlement of its dispute with Express in July, Walgreen (NYSE: WAG) in October made an announcement that it will be working as a preferred pharmacy network for the Medicare Part D Plan which will let the members access better and faster pharmacy services and moreover will be cost saving. It also introduced a health care program WellTransition which was created to minimize the readmission rates, reduce the overall healthcare cost and improving the patients’ health. Walgreen's 45% stake in Alliance Boots remains its strength in diversifying its market. Walgreen will take advantage of Alliance's operations in the emerging markets where it has strong footholds and further giving tough competition to Pfizer and Abbott Laboratories.
On the other hand, Express Scripts (NASDAQ: ESRX) had a successful selling season in which the company got 215 new contracts while retaining 95% of the existing clients. It has made it one of the biggest acquisitions of Medco Health Solutions worth $29 billion which aims at reducing prescription cost and improving health quality. The Company's 3Q12 earnings which reported $27 billion shows that this deal has started paying off and the company is further expected to surpass $100 billion in revenue in the next year. Coming to its generic business, it accounts for more profit than its branded drugs because they give a huge turnover due to the increased price gap, moreover it is making efforts to make this business more profitable by reducing the prices for its customers so that it is used more.
Talking about CVS, there are many factors that will keep CVS swinging, but I feel the below discussed fundamentals will contribute much in the coming years:
Retail Segment Growth: CVS's retail segment continues to see upswings as during the Walgreen and Express Script dispute 85% of the Express Script customers switched to CVS's ExtraCare program. In its Extracare program the member receives mails in regard to the Weekly deals and the program also offers 2% back on the non-prescribed purchases and $1 reward for two prescriptions drugs purchased. This loyalty program is considered to be an effective customer retention tool and has returned $2.7 billion of value to its ExtraCare cardholders till 2012 and it has 700 million active users. In 3Q12 revenue from this segment increased by 5.5% and same store sales increased by 4.3%.
Growth from generic: Generics are winning over brand name drugs as generics are 30% to 80% cheaper than the branded ones and CVS is filling most of its prescriptions with the generic drugs and moreover, it must be understood here that the generics provide the same benefits as the branded drug. And many of the named brand drugs are about to lose their patent in 2016 and I think the company will be definitely looking forward to monetize this opportunity. The company will purchase generics directly from manufacturers at lower prices avoiding the cost of the wholesaler in the middle. It seems CVS is on the track to gain positive results for years to come and make a strong foothold in the generic business. With the generic wave growing, margins are expected to rise to 19.57% in 2013.
Summing up, these prospects are taking this company a long way and in the 2012 selling season it expects to retain 60% of its clients. CVS has made mobile enhancements by adding new health and mobile features to its mobile suite which aim to personalize the shopping and healthcare experience. Its RX-one remains its most watched category which contributes 85% of the company's sales. Moreover the company made a $2 billion share repurchase in this quarter. Industry trends will continue to support CVS as US healthcare will be in focus in the coming years due to the aging population and increased pharmaceuticals consumption.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services recommend Express Scripts. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!