CVS Says Tailwinds Favor PBM-Retail Hybrid Business Model
February 28 2012 - 11:29AM
Dow Jones News
CVS Caremark Corp. (CVS) Chief Financial Officer David Denton
said the company's retail and pharmacy-benefit manager hybrid model
lines up nicely to serve long-term healthcare trends, while also
touting other tailwinds generated from changes in the industry.
Specifically, Denton said CVS was picking up more than its fair
share of customers that have been driven away from rival Walgreen
Co. (WAG) due to its impasse with PBM Express Scripts Inc. (ESRX).
While other pharmacy providers such as Wal-Mart Stores Inc. (WMT)
and Target Corp. (TGT) are also going after Express Scripts clients
that can no longer go to Walgreen to fill prescriptions, Denton
said Walgreen customers likely will ultimately prefer a drugstore
chain.
Additionally, he noted the labor-intensive transfer-process
costs were expected to be higher in the first half of the year
before normalizing later in 2012. Denton made the comments at the
RBC Healthcare Conference in New York City.
CVS's shares ended 2011 with a 17% gain, exceeding the broader
market's growth and far better than the 15% drop for Walgreen, as
investors and analysts praise the company's integration of PBM
Caremark. Other factors favoring CVS include an aging U.S.
population, health-care reform that will give about 30 million more
Americans access to coverage and a wave of generic offerings that
are hitting the market.
The competitive market could be poised for a dramatic shake up
if the Federal Trade Commission approves Express Scripts's planned
purchase of PBM peer Medco Health Solutions Inc. (MHS). Though
Denton says CVS watches the PBMs carefully, he said his company's
hybrid model lines up more effectively to long-term health-care
trends.
Denton called the Medco-Express Scripts combination a
"traditional PBM model" that has worked in the commercial arena by
pushing mandatory-mail programs, but as more prescriptions shift to
Medicare and Medicaid, Denton says the integrated slate of assets
CVS offers are more ideal. Denton estimates that within a decade,
roughly 70% to 75% of all prescriptions will be in the form of
Medicare or Medicaid.
After generating $4.6 billion of free cash flow last year, CVS
expects the figure to range between $4.6 billion and $4.9 billion
this year. Denton said CVS will use that money to invest in its
business, repurchase shares, and fund a potential dividend hike.
CVS last year raised its payout by 30%, building on a 43% increase
two years ago.
CVS shares were up 14 cents to $44.67 in recent trading. The
stock has jumped 9.6% this year, outperforming the broader market's
gain.
--By John Kell, Dow Jones Newswires; 212-416-2480;
john.kell@dowjones.com
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