netrashetty
Netra Shetty
CVS/pharmacy (commonly called CVS) is the second largest pharmacy chain in the United States (after Walgreens), with approximately 7,027 stores in 45 states and Puerto Rico.[1] As the retail pharmacy division of CVS Caremark, it sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods through their CVS/pharmacy and Longs Drugs retail stores and online through CVS.com. It also provides healthcare services through its MinuteClinic healthcare clinics as well as their Diabetes Care Centers. Most of these clinics are located within CVS stores.
CVS is incorporated in Delaware, and is based in Woonsocket, Rhode Island. It was founded in Lowell, Massachusetts in 1963.
CVS Caremark (NYSE: CVS) is the largest U.S. pharmacy services provider, with $99 billion in 2009 sales and $3.7 billion in profits.[1] It operates pharmacies, which sell prescription and Over the Counter (OTC) drugs, as well as retail merchandise such as cosmetics, convenience foods, and photo processing services. It also provides mail-order pharmaceutical services like prescription fulfillment. Through its businesses, CVS fills or manages more than 1 billion prescriptions per year.[2]
The company benefits from the increased demand for drugs from aging baby boomers, the general increase in prescription drug coverage over the last decade, and the expansion of government spending on health care through programs like Medicare Part D. However, the company does face challenges especially with its largest competitor Walgreen Company (WAG). In June 2010, Walgreen's announced that it was pulling out of the CVS Caremark retail pharmacy network -- a program that allows customers to buy prescription drugs from any pharmacy in the network at a discounted price - because they claimed that they weren't getting a fair share of the profits. As a result, the network lost 7,500 of Walgreen's pharmacies.
Company Overview
CVS Caremark Corporation consists of two major segments: retail pharmacy and pharmacy services. CVS operated over 7,000 retail pharmacy stores nationwide, including CVS Pharmacy stores as well as recently acquired Longs Drug Stores. In addition, it operates the Pharmacy Benefit Manager (PBM) Pharmacare (including , as well as recent acquisitions: the PBM Caremark, retail health clinic MinuteClinic (mostly located inside CVS pharmacies), and Longs Drug Stores.
Contents
1 Company Overview
1.1 Business Segments[4]
1.1.1 Retail Pharmacy (59% of income)
1.1.2 Pharmacy Services (41% of income)
1.2 Company Growth Through Acquisitions
1.2.1 Longs Drug Stores
1.2.2 Caremark RX
1.2.3 Medicare Part D Business
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[1]
2.2 Q1 FY2010 (ended March 31, 2010)[9]
2.3 Q2 FY2010 (ended June 30, 2010)[10]
2.4 Q3 FY2010 (ended September 30, 2010)[11]
3 Key Trends and Forces
3.1 Tension Between CVS Caremark and Walgreen Over Retail Pharmacy Network
3.2 Baby Boomers are Helping CVS' Profitability as They Age
3.3 CVS Benefits from Economic Slowdown as Patients Migrate Toward Lower Cost Generics
3.4 Health Reform Legislation Encourages Increased Drug Utilization
3.5 When Major Drug Manufacturers Suffer, Retail Pharmacy Generics Prosper
4 Competition
5 References
2009 CVS Revenues by Business Segment[3]
Business Segments[4]
Retail Pharmacy (59% of income)
CVS's retail pharmacy business segment consists of all revenue generated from sales of drugs and general merchandise in CVS stores. CVS has the largest network of retail stores in the retail pharmacy industry and generates more than half of its revenue from this segment. The retail pharmacy business also provides health care services through its MinuteClinics, which serve to diagnose and treat minor health issues. At the end of 2009, the retail pharmacy business consisted of 7,025 retail stores and 569 retail health clinics. Here is the breakdown of sales by product type:
Prescription drugs - 68% of net revenue
Over-the-counter and personal care - 11% of net revenue
Beauty/cosmetics - 5% of net revenue
General merchandise and other - 16% of net revenue
Pharmacy Services (41% of income)
CVS's pharmacy services segment provides "prescription benefit management services, such as mail-order pharmacy services, prescription plan design, and claims processing. CVS's main customers in this segment are businesses and organizations that sponsor health plans for their members. This segment primarily generates its revenue through contracts with these organizations. In 2009, the pharmacy services segment earned $2.9 billion in operating profit from $51.1 billion in sales for an operating margin of 5.6%.
On July 28, 2010, CVS signed a major deal with Aetna (AET), in which CVS's Pharmacy Services division Caremark will serve roughly 9.7 million Aetna PBM members and administer a total of $9.5 billion in drug spending each year, and this contract plans to benefit CVS's earnings starting 2013.[5]
Company Growth Through Acquisitions
Longs Drug Stores
In November 2008, CVS completed the acquisition of Longs Drug Stores (LDG) for $2.7 billion. Longs Drug Stores (LDG) ran a similar business to CVS and was heavily concentrated in California, Hawaii, Nevada and Arizona, markets with few or no CVS store locations. The transaction brought 521 Longs drug stores under CVS ownership, dramatically increasing its presence in these markets.[6]
Caremark RX
In March of 2007, CVS and Caremark completed their merger, creating one of the first true mergers between a retailer and a PBM. Caremark RX was a PBM that provided comprehensive disease and prescription benefit management services. It operated a retail pharmacy network that included over 60,000 participating pharmacies (including CVS/Pharmacy), 28 mail-order pharmacies, and an FDA-approved repackaging plant (the only one in the industry). The acquisition benefited CVS through cost savings (from Economies of scale), by growing the company's position in mail order prescription drugs, and by giving customers a more centralized prescription filing method.
Medicare Part D Business
CVS announced its acquisition of Universal American's Medical Part business for $1.25 billion in January 2011. After this acquisition, CVS will become the largest provider of prescription drug services for Medicare recipients by doubling CVS's presence in the fast-growing market to 3.1 million members from 1.2 million.[7] Medicare Part D currently serves 28 million people and the acquisition will provide the potential pipeline of customers for CVS's retail pharmacy chain, which operates a total of 7,100 stores domestically. As CVS continues its aggressive acquisition strategy, Federal Trade Commission continues to investigate whether CVS is engaged in anticompetitive practices, as attorneys general across 24 states are conducting similar inquiries.[8]
Business Growth
FY 2009 (ended December 31, 2009)[1]
Net revenue increased 12.95 to $98.7 billion.
Net income was $3.7 billion, an increase of 15%.
Operating margin fell 40 bps to 6.5% of net revenue. Operating profits for the year was $6.4 billion, compared to $6 billion a year ago.
The company opened 93 net stores in 2009.
Q1 FY2010 (ended March 31, 2010)[9]
Net revenue increased 366 million to $23,760 million.
Net income was $771 million, an increase of 4.5%.
Operating margin went up 5 bps to 5.93% of net revenue.
The company opened 48 net stores during the quarter.
Q2 FY2010 (ended June 30, 2010)[10]
Net revenue decreased 864 million to $24,007 million.
Net income was $821 million, an increase of 7.3%.
Operating margin went down 18 bps to 6.25% of net revenue.
The company opened 50 net stores during the quarter.
Q3 FY2010 (ended September 30, 2010)[11]
Net revenue decreased 767 million to $23,875 million.
Net income was $809 million, an decrease of 20.8%.
Operating margin went down 13 bps to 6.22% of net revenue.
The company opened 49 net stores during the quarter.
Same store sales increased by 2.5%.
Key Trends and Forces
Tension Between CVS Caremark and Walgreen Over Retail Pharmacy Network
In June 2010, Walgreens announced that it would no longer participate in CVS' drug benefits unit. Walgreens argued that they were not getting their fair share of the profits and alleged that participants had to fill out their prescriptions at a CVS or Caremark mail service instead of at a Walgreens. As a result, CVS Caremark said that it was terminating Walgreens from its retail pharmacy network. In addition, it was also terminating Walgreens' participation in its Medicare Part D. CVS' retail pharmacy network includes 57,000 pharmacies nationwide and allows customers to purchase their prescriptions at any at pharmacy in the network at a reduced price. When Walgreens was apart of the network, CVS Caremark customers could purchase their prescriptions at Walgreens at the CVS price. CVS would then reimburse them and give the network pharmacy a share of the profits. CVS claims that the loss of Walgreen's 7,500 stores does not have a large effect on its network since 92% of Caremark members have access to a participating pharmacy within a 5-mile radius of where they live, with or without Walgreens in the network. In 2009, the network registered 660 million pharmaceutical transactions. The termination goes into effect in July 2010.[12][13]
Baby Boomers are Helping CVS' Profitability as They Age
Several external trends are currently increasing all pharmacies' revenues across the industry. In addition to increased sales of prescriptions, CVS will benefit as additional foot traffic for the pharmacy naturally leads to increased retail sales in the front end of the store.
Baby boomers are only getting older, and will be more likely to need prescription medications in the coming years
There has been an increase in prescription drug coverage over the last 10 years
Medicare Part D came into effect in January 2006, which expanded coverage to millions of people who were previously uninsured. Medicare Part D makes it more difficult to prescribe more expensive drugs, shifting overall product mix toward generics (which, although cheaper, generate higher margins). In June 2010, over 29.3 million people were enrolled in Medicare Part D. [14]
Over the next five years, around $50 billion in branded drug sales will lose patent protection, opening them to generics and driving profit margins
CVS Benefits from Economic Slowdown as Patients Migrate Toward Lower Cost Generics
CVS's revenues come from both pharmacy sales and non-pharmacy, or front store, sales. Though medical costs such as prescriptions are not discretionary expenses and thus less vulnerable to an economic downturn, patients still migrate towards lower cost generic drugs instead of more expensive brand name drugs. CVS stands to benefit from this, as they receive higher levels of reimbursement from groups like Medicare for generic drugs. Additionally, CVS Chief Executive Tom Ryan says that very little of front store sales comes from "true discretionary sales," meaning that same store sales won't be affected by penny-pinching consumers. As a result, CVS has had increasing net sales and net income through the worst part of the recession. In 2009 and 2008, net sales grew by 13% and 15% respectively and net income grew by 15% and 22% respectively.[1]
Health Reform Legislation Encourages Increased Drug Utilization
The Patient Protection and Affordable Care Act, the much awaited and much debated health reform law signed into law on March 30, 2010 by President Obama, may indirectly help US pharmacies by encouraging increased drug utilization, which could boost pharmacy sales.
First, the law is projected to expand insurance to 32 million Americans previously without coverage. Presumably, newly uninsured patients will increase their utilization of drugs. Part of this expansion of coverage is done through an insurance mandate, while part is done by an expansion of Medicaid eligibility. Partially offsetting the benefit accrusing from those newly covered under Medicaid will be the lower reimbursement rates paid by the program to pharmacies relative to cash customers (who pay higher prices but generally buy fewer drugs).
Second, the law partially fills in the Medicare Part D coverage gap, or "donut hole". This is a gap in Medicare prescription drug coverage that kicks in after a moderately high annual threshold of spending ($2,830 in 2010) on prescription drugs is reached. Before then, Medicare generally covers about two-thirds of drug cost; after reaching the gap, the next $3,610 worth of drugs is fully paid for by the patient, after which Medicare covers 95% of all remaining costs. In 2010 Medicare patients that reach the coverage gap will receive a $250 government rebate. Beginning in 2011, they will also receive a 50% discount on branded drugs. Over the next nine years, a series of discounts and benefits will lead to elimination of the gap. This should make sicker patients with high drug spend less price-sensitive and thus also encourage drug utilization.[15]
When Major Drug Manufacturers Suffer, Retail Pharmacy Generics Prosper
Major drug manufacturers carrying common household OTC medications such as Tylenol, Advil, and Motrin are six times more likely to be purchased by consumers than its same function generics.[16] The main idea behind this thinking, even though most often than not the drug facts are the same, is consumers grew up with these brands and perceive them as safer or more effective than inferior goods.
However, when in the rare case that these trusted household brands are recalled, consumers are often thrown into confusion and will make the switch over to retail pharmacy generics, sometimes permanently. This presents a very valuable opportunity for retail pharmacies. For example, when JOHNSON & JOHNSON (JNJ)'s drugmaking unit McNeil recalled millions of children's and adult versions of those drugs over the past 10 months since late 2009, many consumers have been fraught with confusion as retail pharmacies have been stuck with inadequate supply.[17]
As a result, all major pharmacies such as CVS, Walgreens and Wal-Mart have revamped private label drug manufacturing by five times capacity versus 2009.[18] As traditional JNJ loyalist consumers are forced to use generics, they may realize that they are just as effective as Tylenol and JNJ, except cheaper. As such, these loyal consumers may choose to permanently change over, which presents an extremely lucrative opportunity for retail pharmacies.
Competition
CVS's biggest competitor is the Walgreens, which generated $63.3 billion in 2009 sales. Walgreens also has its own PBM, Walgreens Health Services, making it the most comparable to CVS Caremark in terms of breadth of offerings. CVS acquired Caremark, it's operating margins increased due to lower operation costs from Economies of scale. CVS earned a 6.5% operating margin in 2009, compared to Walgreen's 5.13% figure.[19]
CVS also competes for market share with discount stores, particularly Wal-Mart. The retail discount giant has a smaller presence in the prescription drug market but dwarfs CVS in front store sales. Its large gains in market share for both prescription drugs and front store sales are likely reflective of decreasing consumer spending in the face of the economic downturn.
CVS Caremark's other competitors include:
Rite Aid
MedcoHealth
Express Scripts
Other discount stores, food/drug combo stores, mail service prescription services, Internet drugstores, PBMs, and other various sellers of retail and prescription merchandise.
Top Drug Store Competitors
Retail Pharmacy Industry — Competitive Operating Metrics (2009) Walgreen Company (WAG) Rite Aid (RAD) CVS Caremark Corporation (CVS) Wal-Mart (WMT) MedcoHealth Solutions (MHS)
Revenue (billions of USD)
Total Revenue 63.335 25.669 98.729 405.046 51.804
Gross Margin 17.163 6.824 20.380 100.389 4.027
Revenue Growth from 2008 7.29% -3.00% 12.87% 0.95% 16.67%
Income
Net Income 2.006 -506.68 3.696 14.335 1.280
Net Profit Margin 3.17% -1.97% 3.76% 3.66% 2.14%
Income Growth from 2008 -7.00% N/A 15.01% 8.75% 16.08%
Other
Earnings per Share 2.16 -0.43 2.56 3.76 2.61
CVS is incorporated in Delaware, and is based in Woonsocket, Rhode Island. It was founded in Lowell, Massachusetts in 1963.
CVS Caremark (NYSE: CVS) is the largest U.S. pharmacy services provider, with $99 billion in 2009 sales and $3.7 billion in profits.[1] It operates pharmacies, which sell prescription and Over the Counter (OTC) drugs, as well as retail merchandise such as cosmetics, convenience foods, and photo processing services. It also provides mail-order pharmaceutical services like prescription fulfillment. Through its businesses, CVS fills or manages more than 1 billion prescriptions per year.[2]
The company benefits from the increased demand for drugs from aging baby boomers, the general increase in prescription drug coverage over the last decade, and the expansion of government spending on health care through programs like Medicare Part D. However, the company does face challenges especially with its largest competitor Walgreen Company (WAG). In June 2010, Walgreen's announced that it was pulling out of the CVS Caremark retail pharmacy network -- a program that allows customers to buy prescription drugs from any pharmacy in the network at a discounted price - because they claimed that they weren't getting a fair share of the profits. As a result, the network lost 7,500 of Walgreen's pharmacies.
Company Overview
CVS Caremark Corporation consists of two major segments: retail pharmacy and pharmacy services. CVS operated over 7,000 retail pharmacy stores nationwide, including CVS Pharmacy stores as well as recently acquired Longs Drug Stores. In addition, it operates the Pharmacy Benefit Manager (PBM) Pharmacare (including , as well as recent acquisitions: the PBM Caremark, retail health clinic MinuteClinic (mostly located inside CVS pharmacies), and Longs Drug Stores.
Contents
1 Company Overview
1.1 Business Segments[4]
1.1.1 Retail Pharmacy (59% of income)
1.1.2 Pharmacy Services (41% of income)
1.2 Company Growth Through Acquisitions
1.2.1 Longs Drug Stores
1.2.2 Caremark RX
1.2.3 Medicare Part D Business
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[1]
2.2 Q1 FY2010 (ended March 31, 2010)[9]
2.3 Q2 FY2010 (ended June 30, 2010)[10]
2.4 Q3 FY2010 (ended September 30, 2010)[11]
3 Key Trends and Forces
3.1 Tension Between CVS Caremark and Walgreen Over Retail Pharmacy Network
3.2 Baby Boomers are Helping CVS' Profitability as They Age
3.3 CVS Benefits from Economic Slowdown as Patients Migrate Toward Lower Cost Generics
3.4 Health Reform Legislation Encourages Increased Drug Utilization
3.5 When Major Drug Manufacturers Suffer, Retail Pharmacy Generics Prosper
4 Competition
5 References
2009 CVS Revenues by Business Segment[3]
Business Segments[4]
Retail Pharmacy (59% of income)
CVS's retail pharmacy business segment consists of all revenue generated from sales of drugs and general merchandise in CVS stores. CVS has the largest network of retail stores in the retail pharmacy industry and generates more than half of its revenue from this segment. The retail pharmacy business also provides health care services through its MinuteClinics, which serve to diagnose and treat minor health issues. At the end of 2009, the retail pharmacy business consisted of 7,025 retail stores and 569 retail health clinics. Here is the breakdown of sales by product type:
Prescription drugs - 68% of net revenue
Over-the-counter and personal care - 11% of net revenue
Beauty/cosmetics - 5% of net revenue
General merchandise and other - 16% of net revenue
Pharmacy Services (41% of income)
CVS's pharmacy services segment provides "prescription benefit management services, such as mail-order pharmacy services, prescription plan design, and claims processing. CVS's main customers in this segment are businesses and organizations that sponsor health plans for their members. This segment primarily generates its revenue through contracts with these organizations. In 2009, the pharmacy services segment earned $2.9 billion in operating profit from $51.1 billion in sales for an operating margin of 5.6%.
On July 28, 2010, CVS signed a major deal with Aetna (AET), in which CVS's Pharmacy Services division Caremark will serve roughly 9.7 million Aetna PBM members and administer a total of $9.5 billion in drug spending each year, and this contract plans to benefit CVS's earnings starting 2013.[5]
Company Growth Through Acquisitions
Longs Drug Stores
In November 2008, CVS completed the acquisition of Longs Drug Stores (LDG) for $2.7 billion. Longs Drug Stores (LDG) ran a similar business to CVS and was heavily concentrated in California, Hawaii, Nevada and Arizona, markets with few or no CVS store locations. The transaction brought 521 Longs drug stores under CVS ownership, dramatically increasing its presence in these markets.[6]
Caremark RX
In March of 2007, CVS and Caremark completed their merger, creating one of the first true mergers between a retailer and a PBM. Caremark RX was a PBM that provided comprehensive disease and prescription benefit management services. It operated a retail pharmacy network that included over 60,000 participating pharmacies (including CVS/Pharmacy), 28 mail-order pharmacies, and an FDA-approved repackaging plant (the only one in the industry). The acquisition benefited CVS through cost savings (from Economies of scale), by growing the company's position in mail order prescription drugs, and by giving customers a more centralized prescription filing method.
Medicare Part D Business
CVS announced its acquisition of Universal American's Medical Part business for $1.25 billion in January 2011. After this acquisition, CVS will become the largest provider of prescription drug services for Medicare recipients by doubling CVS's presence in the fast-growing market to 3.1 million members from 1.2 million.[7] Medicare Part D currently serves 28 million people and the acquisition will provide the potential pipeline of customers for CVS's retail pharmacy chain, which operates a total of 7,100 stores domestically. As CVS continues its aggressive acquisition strategy, Federal Trade Commission continues to investigate whether CVS is engaged in anticompetitive practices, as attorneys general across 24 states are conducting similar inquiries.[8]
Business Growth
FY 2009 (ended December 31, 2009)[1]
Net revenue increased 12.95 to $98.7 billion.
Net income was $3.7 billion, an increase of 15%.
Operating margin fell 40 bps to 6.5% of net revenue. Operating profits for the year was $6.4 billion, compared to $6 billion a year ago.
The company opened 93 net stores in 2009.
Q1 FY2010 (ended March 31, 2010)[9]
Net revenue increased 366 million to $23,760 million.
Net income was $771 million, an increase of 4.5%.
Operating margin went up 5 bps to 5.93% of net revenue.
The company opened 48 net stores during the quarter.
Q2 FY2010 (ended June 30, 2010)[10]
Net revenue decreased 864 million to $24,007 million.
Net income was $821 million, an increase of 7.3%.
Operating margin went down 18 bps to 6.25% of net revenue.
The company opened 50 net stores during the quarter.
Q3 FY2010 (ended September 30, 2010)[11]
Net revenue decreased 767 million to $23,875 million.
Net income was $809 million, an decrease of 20.8%.
Operating margin went down 13 bps to 6.22% of net revenue.
The company opened 49 net stores during the quarter.
Same store sales increased by 2.5%.
Key Trends and Forces
Tension Between CVS Caremark and Walgreen Over Retail Pharmacy Network
In June 2010, Walgreens announced that it would no longer participate in CVS' drug benefits unit. Walgreens argued that they were not getting their fair share of the profits and alleged that participants had to fill out their prescriptions at a CVS or Caremark mail service instead of at a Walgreens. As a result, CVS Caremark said that it was terminating Walgreens from its retail pharmacy network. In addition, it was also terminating Walgreens' participation in its Medicare Part D. CVS' retail pharmacy network includes 57,000 pharmacies nationwide and allows customers to purchase their prescriptions at any at pharmacy in the network at a reduced price. When Walgreens was apart of the network, CVS Caremark customers could purchase their prescriptions at Walgreens at the CVS price. CVS would then reimburse them and give the network pharmacy a share of the profits. CVS claims that the loss of Walgreen's 7,500 stores does not have a large effect on its network since 92% of Caremark members have access to a participating pharmacy within a 5-mile radius of where they live, with or without Walgreens in the network. In 2009, the network registered 660 million pharmaceutical transactions. The termination goes into effect in July 2010.[12][13]
Baby Boomers are Helping CVS' Profitability as They Age
Several external trends are currently increasing all pharmacies' revenues across the industry. In addition to increased sales of prescriptions, CVS will benefit as additional foot traffic for the pharmacy naturally leads to increased retail sales in the front end of the store.
Baby boomers are only getting older, and will be more likely to need prescription medications in the coming years
There has been an increase in prescription drug coverage over the last 10 years
Medicare Part D came into effect in January 2006, which expanded coverage to millions of people who were previously uninsured. Medicare Part D makes it more difficult to prescribe more expensive drugs, shifting overall product mix toward generics (which, although cheaper, generate higher margins). In June 2010, over 29.3 million people were enrolled in Medicare Part D. [14]
Over the next five years, around $50 billion in branded drug sales will lose patent protection, opening them to generics and driving profit margins
CVS Benefits from Economic Slowdown as Patients Migrate Toward Lower Cost Generics
CVS's revenues come from both pharmacy sales and non-pharmacy, or front store, sales. Though medical costs such as prescriptions are not discretionary expenses and thus less vulnerable to an economic downturn, patients still migrate towards lower cost generic drugs instead of more expensive brand name drugs. CVS stands to benefit from this, as they receive higher levels of reimbursement from groups like Medicare for generic drugs. Additionally, CVS Chief Executive Tom Ryan says that very little of front store sales comes from "true discretionary sales," meaning that same store sales won't be affected by penny-pinching consumers. As a result, CVS has had increasing net sales and net income through the worst part of the recession. In 2009 and 2008, net sales grew by 13% and 15% respectively and net income grew by 15% and 22% respectively.[1]
Health Reform Legislation Encourages Increased Drug Utilization
The Patient Protection and Affordable Care Act, the much awaited and much debated health reform law signed into law on March 30, 2010 by President Obama, may indirectly help US pharmacies by encouraging increased drug utilization, which could boost pharmacy sales.
First, the law is projected to expand insurance to 32 million Americans previously without coverage. Presumably, newly uninsured patients will increase their utilization of drugs. Part of this expansion of coverage is done through an insurance mandate, while part is done by an expansion of Medicaid eligibility. Partially offsetting the benefit accrusing from those newly covered under Medicaid will be the lower reimbursement rates paid by the program to pharmacies relative to cash customers (who pay higher prices but generally buy fewer drugs).
Second, the law partially fills in the Medicare Part D coverage gap, or "donut hole". This is a gap in Medicare prescription drug coverage that kicks in after a moderately high annual threshold of spending ($2,830 in 2010) on prescription drugs is reached. Before then, Medicare generally covers about two-thirds of drug cost; after reaching the gap, the next $3,610 worth of drugs is fully paid for by the patient, after which Medicare covers 95% of all remaining costs. In 2010 Medicare patients that reach the coverage gap will receive a $250 government rebate. Beginning in 2011, they will also receive a 50% discount on branded drugs. Over the next nine years, a series of discounts and benefits will lead to elimination of the gap. This should make sicker patients with high drug spend less price-sensitive and thus also encourage drug utilization.[15]
When Major Drug Manufacturers Suffer, Retail Pharmacy Generics Prosper
Major drug manufacturers carrying common household OTC medications such as Tylenol, Advil, and Motrin are six times more likely to be purchased by consumers than its same function generics.[16] The main idea behind this thinking, even though most often than not the drug facts are the same, is consumers grew up with these brands and perceive them as safer or more effective than inferior goods.
However, when in the rare case that these trusted household brands are recalled, consumers are often thrown into confusion and will make the switch over to retail pharmacy generics, sometimes permanently. This presents a very valuable opportunity for retail pharmacies. For example, when JOHNSON & JOHNSON (JNJ)'s drugmaking unit McNeil recalled millions of children's and adult versions of those drugs over the past 10 months since late 2009, many consumers have been fraught with confusion as retail pharmacies have been stuck with inadequate supply.[17]
As a result, all major pharmacies such as CVS, Walgreens and Wal-Mart have revamped private label drug manufacturing by five times capacity versus 2009.[18] As traditional JNJ loyalist consumers are forced to use generics, they may realize that they are just as effective as Tylenol and JNJ, except cheaper. As such, these loyal consumers may choose to permanently change over, which presents an extremely lucrative opportunity for retail pharmacies.
Competition
CVS's biggest competitor is the Walgreens, which generated $63.3 billion in 2009 sales. Walgreens also has its own PBM, Walgreens Health Services, making it the most comparable to CVS Caremark in terms of breadth of offerings. CVS acquired Caremark, it's operating margins increased due to lower operation costs from Economies of scale. CVS earned a 6.5% operating margin in 2009, compared to Walgreen's 5.13% figure.[19]
CVS also competes for market share with discount stores, particularly Wal-Mart. The retail discount giant has a smaller presence in the prescription drug market but dwarfs CVS in front store sales. Its large gains in market share for both prescription drugs and front store sales are likely reflective of decreasing consumer spending in the face of the economic downturn.
CVS Caremark's other competitors include:
Rite Aid
MedcoHealth
Express Scripts
Other discount stores, food/drug combo stores, mail service prescription services, Internet drugstores, PBMs, and other various sellers of retail and prescription merchandise.
Top Drug Store Competitors
Retail Pharmacy Industry — Competitive Operating Metrics (2009) Walgreen Company (WAG) Rite Aid (RAD) CVS Caremark Corporation (CVS) Wal-Mart (WMT) MedcoHealth Solutions (MHS)
Revenue (billions of USD)
Total Revenue 63.335 25.669 98.729 405.046 51.804
Gross Margin 17.163 6.824 20.380 100.389 4.027
Revenue Growth from 2008 7.29% -3.00% 12.87% 0.95% 16.67%
Income
Net Income 2.006 -506.68 3.696 14.335 1.280
Net Profit Margin 3.17% -1.97% 3.76% 3.66% 2.14%
Income Growth from 2008 -7.00% N/A 15.01% 8.75% 16.08%
Other
Earnings per Share 2.16 -0.43 2.56 3.76 2.61