CVS Wins $3 Billion U.S. Federal Worker Health-Benefit Contract Over Medco
CVS Wins $3 Billion Government Benefits Contract
Eliot J. Schechter/Bloomberg
CVS Caremark Corp. signage is displayed outside a pharmacy in Ft. Lauderdale, Florida.
CVS Caremark Corp. signage is displayed outside a pharmacy in Ft. Lauderdale, Florida. Photographer: Eliot J. Schechter/Bloomberg
May 27 (Bloomberg) -- Medco Health Solutions Inc., the largest U.S. pharmacy benefits manager by sales, will lose a $3 billion Blue Cross Blue Shield Association contract to CVS Caremark Corp. in 2012, taking almost 5 percent of its revenue. Shannon Pettypiece reports on Bloomberg Television's "In the Loop." Betty Liu also speaks. (Source: Bloomberg)
CVS Caremark Corp. (CVS) won a $3 billion contract to provide pharmacy benefits to federal employees, easing concern that the largest U.S. buyer and seller of prescription drugs is losing business to rivals.
Medco Health Solutions Inc. (MHS), which had held the contract, disclosed today that Blue Cross Blue Shield Association planned to switch to another provider by 2012. Medco shares sank 9 percent for the biggest loss since October 2008. CVS said the new agreement, which starts Jan. 1, 2012, will run through 2014.
CVS, based in Woonsocket, Rhode Island, has sought to recapture business after losing $4.8 billion in 2010 contracts to rivals because of pricing and service. The contract may increase investors’ confidence in the company’s strategy since the 2007 merger that united Caremark’s drug benefits manager with the pharmacy chain, said Robert Summers, an analyst for Susquehanna Financial Group in New York.
“It’s a very good step in the right direction in a business that has been challenging to them,” said Summers, who has a “positive” rating on CVS. “Maybe this is foreshadowing easier times ahead in terms of them winning share.”
CVS rose 65 cents, or 1.7 percent, to $38.80 at 4 p.m. in New York Stock Exchange composite trading. Medco, based in Franklin Lakes, New Jersey, fell $5.78 to $58.66.
Earnings Benefit
The contract may be worth $80 million in operating income, or about 4 cents a share, to CVS, Meredith Adler, an analyst for Barclays Capital Inc. in New York, wrote in a note to clients. CVS generated net income of $3.43 billion, or $2.49 a share, on revenue of $96.4 billion last year.
The Blue Cross Blue Shield contract accounted for almost 5 percent of Medco’s $66 billion in revenue last year, according to data compiled by Bloomberg. It includes 9.8 million annual prescriptions and expires Dec. 31, said Medco, the largest U.S. pharmacy-benefits manager by revenue.
“We are disappointed that BCBSA has chosen a different direction for its PBM services,” Jennifer Luddy, a Medco spokeswoman, said today in an e-mail. “We look forward to the opportunity to serve BCBSA in the future.”
Medco lost the federal-employees contract primarily because CVS undercut the company on price, said Art Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee.
“CVS needed a win of this magnitude and competed hard on price,” Henderson said in a telephone interview.
The decision was also probably shaped by the scandal surrounding a contract with the California Public Employees’ Retirement System, Henderson said. Medco lost a $500 million contract covering 340,000 Calpers members in March after the pension fund revealed that Calpers’ board members may have been influenced with favors to award the original contract in 2005.
“The Calpers scandal left a bad taste in people’s mouth,” said Henderson, who has a “buy” rating on Medco.
To contact the reporters on this story: Matthew Townsend in New York at mtownsend9@bloomberg.net; Pat Wechsler in New York at pwechsler@bloomberg.net
To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net
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