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Six Reasons to Be Bullish on CVS Caremark: Opinion

Stocks in this article: CVX WAG RAD ESRX

NEW YORK ( Trefis) -- There was initial skepticism about the viability of CVS Caremark's (CVS) business model, which integrates retail with pharmacy benefits management.

But the company has turned around the outlook of its PBM business within a year by winning multiple high profile contracts and emerging as the second largest player in the space.

It also has keenly leveraged its 7,400-strong drugstore network to unlock the full potential of the PBM business through differentiated and unique offerings that it calls its "integration sweet spots" such as Maintenance Choice and Pharmacy Advisor.

Also, CVS Caremark's core retail business continues to be as robust as ever and is benefiting from the dispute between Walgreen (WAG)- Express Scripts (ESRX) and margin expansion as more prescription drugs go generic this year.

Here we look at six reasons why we are more optimistic about CVS Caremark compared to rivals Walgreen, Rite Aid (RAD) and Express Scripts (ESRX).

View our detailed analysis for CVS Caremark here.

1. PBM Turnaround

CVS Caremark aggressively expanded its PBM business in 2011 by winning multiple high-profile contracts with clients including CalPERS, Aetna, FEP and Universal American and quickly turned around the company's outlook for the business.

Last quarter, its PBM revenues grew 32% as it processed 17% more mail choice and 26% more pharmacy network claims compared to the year before. It benefited from its leading market share in Medicare Part D prescription business as well as high growth in specialty pharmacy and strong adoption of its Maintenance Choice plans.

2. Leading Presence in Medicare Part D Plans

Over the past year, CVS has gradually consolidated its PBM market share in the federally-sponsored Medicare Part D prescription business (primarily focusing on Americans aged 65 and older) through acquisitions.

In 2012, CVS Caremark's Part D share has grown by 2.1 million persons enrolled, primarily due to its contracts with Universal American (UAM) and HealthNet (HNT), plus organic growth of 207,000 enrolled. It now serves more than 4 million, just marginally behind UnitedHealth (UNH), which lost almost half a million enrolled last year.

Medicare Part D is set to get a boost from the aging U.S. population and health reforms that would significantly increase prescription utilization and help plug the Medicare Part D coverage gap. The segment is expected to grow in double digits annually over this decade. The U.S. government is rapidly emerging as the major payer for prescription drugs. It is expected that Medicare and Medicaid could be paying for as much as two-thirds of all U.S. prescriptions by 2020, up from about one-third today, indicating a huge opportunity for CVS Caremark.

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