Walgreen's Loss Is CVS's Gain

CVS Caremark (NYSE: CVS  ) saw its first-quarter profit rise by 9%, helped by a sharp growth in its top line as it continued to cash in on the Express Scripts (Nasdaq: ESRX  ) -Walgreen (NYSE: WAG  ) impasse. As a bonus for investors, the drug retailer raised its annual guidance as well.  

Revenue rose 19% to $30.8 billion from a year ago. Revenue from pharmacy services rose by a staggering 32.3% as the company benefited from its acquisition of Universal American's (NYSE: UAM  ) Medicare prescription-drug plan business in the second quarter of the previous year. The acquisition caused CVS's pharmacy network claims to rise by as much as 25.9% for the first three months of this year.

Revenue from its retail pharmacy wing rose 9.9%, with same-store sales going up by an impressive 8.4%. Sales in this segment climbed as CVS gained customers who used to fill their prescriptions at Walgreen, which exited the Express Scripts network at the start of the year after the two squabbled over pricing. As the impasse hasn't been resolved, CVS can expect to gain more and more customers. It already anticipates an earnings boost of $0.03-$0.04 per share in the next quarter from the fallout.

Last quarter, CVS CEO Larry Merlo said, "The pharmacy customer is the hardest person to lose, but once you lose them, it's the hardest person to get back." It's pretty clear that CVS hopes to continue to benefit from Walgreen's lost customers.  

The changing PBM space
As CVS enters the supposed pharmacy benefit management "selling season," it'll hope to bag as many corporate contracts as it possibly can. However, the recent merger between Express and Medco -- which effectively created the largest PBM, may stand in the way. Most fear that the union may end up creating a virtual monopoly, which may have a big effect on prices. However, Edward Jones analyst Judson Clark believes that the merger "doesn't pose a threat." "In many ways this can be good for CVS, because they're the clear alternative," Clark said in a Reuters article. But CVS doesn't want to become the "alternative" rather than the first choice. If it does, that would be a worrying sign.

Nonetheless, on the back of a pretty strong quarter, CVS raised its annual guidance to between $3.23 and $3.33 per share, up from the earlier $3.01 to $3.11. The PBM space will be interesting in the coming quarters, especially as the whole sector becomes more and more consolidated. We've already seen Express and Medco unite, and more recently SXC Health Solutions (Nasdaq: SXCI  ) reached a deal worth $3.64 billion to combine with Catalyst Health Solutions. We'll want to keep an eye on how CVS copes with the changing dynamics in the PBM space.

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Fool contributor Shubh Datta doesn't own shares in the companies listed above. Motley Fool newsletter services have recommended buying shares of Express Scripts Holding and SXC Health Solutions. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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