Recently, CVS Caremark Corporation (CVS) tied up with Direct Relief USA to offer up to $6 million in free flu shots to community clinic and health center patients who have no health insurance coverage. As per the program, over 400 participating clinics and health centers of Direct Relief will identify the uninsured patients and provide them with free flu shot vouchers, redeemable at any CVS/pharmacy or MinuteClinic location.
Presently, CVS/pharmacy covers over 7,200 locations and MinuteClinic has nearly 600 locations. According to The Centers for Disease Control and Prevention (CDC), flu shot should be taken by all (aged six months and above) as soon as the vaccine is available in the market, including even those who were vaccinated during the last flu season.
Flu activity is steadily increasing in the US following the widespread outbreak of influenza cases. Each year, 3,600 to 49,000 deaths occur due to influenza in the US. Annually over 200,000 Americans are admitted to the hospitals with flu-related complications. Over the past three years, CVS donated up to $14 million in free flu shots to uninsured patients to fight against three influenza viruses.
The company’s Retail Pharmacy segment (generates 49% of CVS’ total revenue) sells prescription drugs and general merchandise (front store products), which includes over-the-counter (OTC) drugs, greeting cards, film and photo finishing services, beauty and cosmetic products, and convenience food through the company’s stores, as well as at CVS.com (the company’s online store). The role of retail pharmacy also includes flu vaccinations and face-to-face patient counseling with respect to adherence to drug therapies, closing gaps in care, and cost-effective drug therapies.
During the second quarter of 2011, revenues from Retail Pharmacy increased 3.6% to $14.8 billion. Through MinuteClinics, the company expects to provide coverage to those 32 million people falling under the insurance bracket beginning in 2014.
We are confident about CVS’ longer-term potential based on its retail execution, deployment potential and strong 2012 generics cycle. Moreover, during the flu season, CVS expects to boost its retail performance further.
We also appreciate the company’s recent victory over its major rival in the PBM segment, Medco (MHS) for Medicare Part D business of Universal American (UAM), the highly-valued FEP contract for three years as well as the biggest US public pension fund CalPers. Based on these recent contract wins and the company’s strong execution skill, we have a Zacks #2 Rank (Buy) on the stock over the short term.
However, we remain concerned regarding the company’s continuous margin pressure. In addition, the proposed acquisition of Medco by Express Script (ESRX) would intensify competition in the PBM space. As a result, we remain ‘Neutral’ on CVS over the long term.
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