MHS Medcohealth Solutions Common Stock

CVS Caremark Corporation (CVS) recently announced a change in top management. According to the company’s design, effective September 1, 2012, the present EVP and Chief Operating Officer of the Pharmacy Benefit Management (PBM) business, Jon Roberts will replace Per Lofberg, the President of the PBM business.

However, Robert will continue to report to Lofberg who extended his employment agreement with the company till December 2013. September onwards, Lofberg will serve as the chairman of the PBM and look after the business strategies of PBM, new business development, client relationship management and retention and will directly report to Larry Merlo, the President and CEO of CVS Caremark.

Rhode Island-based CVS Caremark is a combination of a PBM as well as retail drug chain. In terms of contractual arrangements with large plan sponsors, CVS Caremark holds a leading position in the industry. Currently, CVS Caremark is ranked among the top three PBMs in the US. The other big players in this space are Express Scripts (ESRX) and Medco Health Solutions (MHS). Together, these three companies control roughly 50% of the market and covers approximately 240 million prescription drug consumers annually. The market share can go up to 80% including the contractual arrangements with large plan sponsors.

However, CVS Caremark’s Pharmacy Services business has been witnessing significant challenges over the past several quarters due to the general macroeconomic turmoil and the recent debt crisis, which adversely impacted consumer purchasing power. Further, the proposed merger between Express Script and Medco will consolidate the industry resulting in the creation of a leader which potentially will hold over one-third of the market. The merger will cover more than 150 million prescription drug consumers and 50% of the large employer market.

We believe that the new management change decision is a part of CVS Caremark’s strategic efforts to minimize the impact of the proposed merger. The company is presently leaving no stone unturned working on this. Jon Roberts in this regards is expected to come up with several new ideas to enhance the company’s position even amid the threat of market cannibalization.

However, uncertainty persists with the US Federal Trade Commission (FTC) issuing a ‘second request’ to both Medco and Express Scripts. The FTC is seeking additional information regarding the pending deal, also supported by the American Antitrust Institute (AAI). Although both the stalwarts anticipate successful closing of the deal by next week, it will go in favor of CVS Caremark if the situation turns around.

Currently, CVS Caremark, Express Scripts, and Medco are serving large plan sponsors. Given their size and potential to offer exclusive contracts, over 40 of the “Fortune 50” largest corporations depend on these three top shots for PBM services. However, post the Express Scripts-Medco merger, in terms of covered lives, we anticipate CVS Caremark to significantly lag the merged entity’s reach.

CVS Caremark currently retains a Zacks #2 Rank (short-term Buy rating). However, over the long term, we are Neutral on the stock, at par with Medco and Express Script.

 
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