The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- With the
Express Scripts PBM
fallout in late June this year, there has been obvious interest in its impact on
, the nation's second-largest drug retailer after Walgreen. In the recent earnings conference call, CVS Caremark's CEO Larry Merlo disclosed that even though some script transfers began to occur in the third quarter, CVS has not reported a material impact to its results so far. However, starting 2012, if an agreement continues to elude Walgreen and Scripts, CVS Caremark could take advantage of this opportunity.
CVS Caremark is an integrated pharmacy services provider and drugstore chain that competes with Walgreen,
in prescription and over-the-counter drugs and general merchandise. It also competes with
Medco Health Solutions
and Express Scripts in pharmacy benefits management.
Walgreen-Express Scripts Dispute
In June 2011, Walgreen announced that it would discontinue filling prescriptions for people covered by Express Scripts from Jan 2012, after its contract renewal negotiations failed on the grounds of uncompetitive reimbursement rates offered by the pharmacy benefits manager. Even though it would have been in the interest of both the parties to reach an agreement, both claimed to be standing farther apart after successive negotiations. Even at the cost of losing billions of dollars in annual revenue, Walgreen has
maintained a hard-line stand not to accept terms similar
to Express Scripts even from other players like Medco. In 2011, Express Scripts will be processing over 90 million prescriptions filled by Walgreen, making up over $5 billion -- or over 7% of Walgreen's sales. With the contract expiring in January, this impasse clearly impacts a significant part of Walgreen's business.
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CVS Expects to Capitalize
So far, CVS Caremark's fourth-quarter guidance does not assume a significant impact from the Walgreens-Express impasse. However, if the issue remains unresolved until next year, when the contract expires, CVS is very likely to be looking at significant opportunity. With its 7,400-plus-strong store network, it is certainly well positioned to service Express Scripts members and capture corresponding financial benefit if/when those scripts become available in the open market and Express members look for a new pharmacy to serve their needs.
In the near term, CVS, with its strong retail presence, expects an almost certain opportunity on the retail side.
We will look for more insight on the potential opportunity for CVS Caremark in its upcoming Analyst Day conference next month where it is expected to outline the expected upside to CVS/pharmacy in 2012 in greater detail.
We have a $45
, about 20% ahead of the current market price.
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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.