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Drug Stores: Industry Analysis

Drug Stores: Industry Analysis

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Drug Stores: Industry Analysis

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  1. Drug Stores: Industry Analysis

    Eric Biro, Ian Johnston, Chris Paluf, Trevor Yerrick
  2. Agenda Industry Overview Express Scripts (PBM) Analysis Walgreens (Pharmacy) Analysis CVS/Caremark (Pharmacy/PBM) Comparison Concluding Insights
  3. Industry Overview $257 billion industry 2.2% annual growth over last 5 years Becoming more of a growth industry as population ages Made up of 2 main businesses Pharmacy Benefit Managers (PBM) Pharmacies
  4. Where’s Walmart? A backwards comparison 15% of net sales in 2 of 3 segments to health and well-being Walmart is a retailer with a pharmacy
  5. Tackling the Industry
  6. PBM Business Model Pharmacy Benefit Manager Process prescriptions for groups that pay for drugs Insurance companies, corporations Use size to create purchasing power Negotiate with drug makers and providers (pharmacies) Pass on cost savings and take a cut
  7. Example
  8. Express Scripts (ESRX) Overall goal: “Develop innovative strategies designed to keep medications affordable” Provide cost-effective formulary Leverage purchase volume to get discounts from manufacturers Promote low cost brands and generics Avoid suboptimal prescription related decisions (inefficient financially)
  9. Express Scripts 99% of revenue from delivery of prescription drugs (1% of revenue from “services”) Network revenue (62%): pass through cost savings and take a cut Home delivery revenue (37%): mail delivered prescription drugs Merged with Medco in 2012 Financial data pre-2012 not representative of merged company Not useful in analyzing combined company’s current and future performance
  10. Forecast Assumptions – ESRX Sales growth: 11% down to 1.75% over 10 year horizon EPM: merger synergies and cost savings drive increase from 2.0% to 4.2% over 10 year horizon EATO: increasing efficiency from 3.00 to 3.92 over 10 year horizon Steady state reached in 2022
  11. EPAT Forecast – ESRX
  12. NEA Forecast – ESRX
  13. NEA Forecast – ESRX
  14. Valuation Using Residual Income – ESRX
  15. Pharmacy Business Model Traditional vs. In-Store Prescription& non-prescription drugs, general merchandise Health and wellness services Convenient care clinics & health/wellness centers Relationship with PBMs Negotiations for reimbursement rates
  16. Walgreens (WAG) Overall Goal: “Helping people get, stay, and live well” Deliver convenient access to consumer goods and pharmaceutical needs Improve health outcomes for patients Manage costs for payers
  17. Walgreens “Nation’s largest drug store chain” 8,582 locations including 8,116 drug stores 63% of sales are prescription drugs Purchased 45% of Alliance Boots in 2012 Option to purchase remaining 55% in 2015 Formed strategic partnership with AmeriSource Bergen in 2013 Included minority equity investment in ASB World’s largest purchaser of pharmaceuticals
  18. Forecast Assumptions – WAG Sales Growth: 4.5% (2014) and 5.5% (2015) $130 B in 2016 (63.5% increase) in first year of combined revenues 5.00% down to 3.50% in 2020 EPM: Synergies and cost savings drive increase to above 5.00% (6.00% in 2020) EATO: Increased efficiency drives increase to above 3.00 (4.00 in 2020) Steady state reached in 2022
  19. EPAT Forecast – WAG
  20. NEA Forecast – WAG
  21. NEA Forecast – WAG
  22. Valuation using Residual Income – WAG
  23. Integrated Pharmacy Services Model Two main segments Pharmacy Services Segment – PBM (Caremark) Retail Pharmacy Segment– Pharmacy (CVS) Competitive advantage through diverse health care offerings and owning its own PBM Reinvent the typical “drug store” business model Overall goal Encourage healthier, more cost-efficient, and personalized behaviors through its distinct integrated services model
  24. CVS/Caremark (CVS) “Largest pharmacy health care provider in the United States” One of the largest drug store chains and PBMs in the US In terms of: Revenues, Net Income, Store Count 7,660 stores in 46 states $126B in 2013 sales Maintain fair and affordable costs and provide the best care
  25. CVS/Caremark Merged with Caremark in 2007 for $27 million (PBM) Recently announced the Company will no longer sell tobacco products starting October 2014 “We strongly believe this decision will further strengthen our position as a healthcare leader, further differentiate us from competitors and better position the company for growth going forward”
  26. Forecast Assumptions – CVS Sales 4.72% growth from 2013-2014, based on analyst projections and market projections 2.07% growth from 2014-2015, based on analyst projections Assumed long term growth of 2.5% EPM 4.66% growth 2013-2014, based on analyst projections Assumed long term growth of 4.97% EATO Assumed long term growth of 2.78
  27. EPAT Forecast – CVS
  28. NEA Forecast – CVS
  29. NEA Forecast - CVS
  30. Valuation Using Residual Income – CVS
  31. Common Size Profitability
  32. DuPont Comparison
  33. Industry Risks & Opportunities Health care reform Uncertain impact: may increase sales due to increased coverage but also may increase compliance and data reporting costs Extremely competitive industry Regulatory environment is rapidly evolving Pharmacy relationships with PBMs Consolidation within the industry (ESRX & Medco) Substantial business concentrated in significant client contracts for PBMs Top 5 clients represent 38% of revenue for ESRX Loss of relationship with drug manufacturers
  34. Future Outlook Express Scripts Merger with Medco will increase purchasing power and margins Lack of diversified product offering will put pressure on sales growth in the future Walgreens Acquisition of Alliance Boots and partnership with AmeriSource Bergen will drive synergies and increase margins CVS Smaller player in pharmacy and PBM business Margins will suffer as competition with ESRX and WAG heightens
  35. Valuation Recommendation ESRX: HOLD CVS: HOLD WAG: HOLD
  36. Questions?