More of PDP Biz for CVS Caremark - Analyst Blog

Recently, CVS Caremark Corporation (CVS) decided to acquire Universal American's (UAM) Medicare Part D business for $1.25 billion, catering to about 1.9 million Prescription Drug Plan (PDP) members. Subsequent to this acquisition, CVS Caremark's Medicare Part D program will increase manifold as the company currently serves 1.2 million members. This is significant since the company's pharmacy benefit management (PBM) business has been recording disappointing performance for the past few quarters.

The transaction, subject to necessary approvals, is expected to close by the end of the second quarter of fiscal 2011. CVS Caremark expects the transaction to be accretive to its earnings in the first year of its completion. Further details related to the deal will be provided by the company along with its fourth quarter results.

Based on a strong cash balance, CVS Caremark has been able to target suitable acquisitions to further strengthen its operations. Cash and cash equivalents at the end of third quarter 2010 were $979 million, down from $1,086 million at the end of December 2009. During the quarter, the company generated free cash flow of $900 million, significantly up from $490 million in the year-ago period. CVS Caremark is confident of achieving a free cash flow target of $2.5 billion in 2010 and further accelerating its growth in 2011 and beyond. It is committed to utilize the majority of free cash flow to return value to shareholders in the form of dividends and share repurchases.

We remain optimistic about domestic demographic trends, which are expected to drive utilization rates for years to come as the population ages. Thus, retail pharmacy operators like CVS Caremark should be able to grow and capture market share. Additionally, the company's mail order service is gaining popularity, which will aid in providing additional top-line opportunities. Besides, CVS Caremark has initiated many steps to make prescription drugs more affordable for consumers.

We are currently ‘Neutral' on the stock.

 
CVS CAREMARK CP (CVS): Free Stock Analysis Report
 
UNIVL AMERICAN (UAM): Free Stock Analysis Report
 
Zacks Investment Research