CVS Caremark CorporationCVS

In recent years, CVS has consistently been a step ahead of Walgreen on the innovation front, for example by owning in-store health clinics, with its ExtraCare rewards program, and with its consumer-friendly store layout.

CVS Caremark integrates clinical services, PBM functions, and retail pharmacy operations, possibly increasing consumer engagement and creating new avenues for cost saving, such as better therapy adherence, the promotion of over-the-counter drug alternatives, or by encouraging the use of in-store clinics instead of expensive emergency rooms.

CVS Caremark benefits from significant secular tail winds, such as health-care spending growth, a wave of patent expirations on major brand-name drugs, and health-care cost-containment efforts. The company can further boost margins by promoting its private-label brands.

The Caremark acquisition insulates CVS from the growing popularity of mail-order pharmacies, which otherwise would threaten to steal prescription volumes from the retail pharmacies.

To the extent CVS has underutilized capacity in its retail stores, prescriptions dispensed at retail may be more cost effective than mail-order. Read more 

CVS Caremark has failed to increase operating income for its PBM anywhere near as quickly as peers Medco and Express Scripts since the merger was completed. Recent contract repricing could be a sign that customers don't see value in the integrated model.

CVS' retail pharmacy must compete with diversified retailers such as Wal-Mart WMT and supermarket chains, which may have an incentive to price pharmaceuticals aggressively to increase store traffic.

Health reform could hold risks for CVS Caremark, including reimbursement pressure and unfavorable changes to industry pricing benchmarks.

Lobbyists for independent pharmacies are trying to get the Federal Trade Commission to re-examine the CVS/Caremark merger. If antitrust concerns emerge, it could prevent the company from realizing the revenue and cost synergies it expected from programs like Maintenance Choice.

Caterpillar CAT recently negotiated agreements directly with Walgreen and Wal-Mart for access to discounted drugs for its employees. Future deals like this could threaten the PBM's role as an intermediary in the pharmaceutical supply chain. Read more