How CVS makes money. I'm quite sure they're making a killing as a PBM. Especially off drug manufacturer rebates.
https://www.investopedia.com/articles/markets/012315/how-cvs-makes-its-money.asp
The demise of
brick-and-mortar retail may be capturing the news, but there are some companies that are thriving, despite the Amazon effect. Even as Amazon's entry into the retail pharmacy business becomes real, CVS Health is not just looking to survive but to grow. News reports
suggest the company is interested in acquiring health insurer Aetna Inc (
AET).
Some History
CVS Health Corp (
CVS) (originally Consumer Value Stores) can trace its lineage all the way back to 1922. Much like Berkshire Hathaway Inc. (
BRK.A), which used to be a couple of textile mills, the current incarnation of CVS would be unrecognizable to its founders. First a shoe company, then a general merchandiser, in the mid-1990s the corporation now known as CVS sold off all its units excluding the lucrative pharmacy operations. Shortly thereafter, it began acquiring rival chains — Eckerd, Osco, Sav-On, and Longs. Today CVS has more than 9,700 retail locations, operating in all but three U.S. states and employing 250,000 people. That’s more than its largest competitor, Walgreens Boots Alliance, Inc. (
WBA).
For accounting purposes, CVS maintains four business divisions. In decreasing order of size, those are pharmacy, medical clinic, pharmacy benefit management and specialty. While CVS revenue has stabilized over the last couple of years, leveling off at $177 billion in 2016. (For related reading, see:
How We'll All Be Amazon.com Customers Eventually.)
Prescriptions and More
CVS's pharmacy division is responsible for more than 67% of its revenue. The term “pharmacy” in this context is a little misleading, and this particular sector of the business should probably best be styled “retail.” It includes not only dispensing prescriptions and administering flu shots, but all the convenience/sundry sales normally associated with visits to the drugstore; everything from candy and cookies, to “As Seen on TV” novelties like Snuggies and Slap Chops.
CVS’s medical clinic operations, branded “MinuteClinic”, include 1,100 retail clinics in 33 states. CVS entered this industry relatively late, but has already become the market leader. (For related reading, see:
How Johnson & Johnson Became a Household Name.)
Benefits Management
As for pharmacy benefit management, that’s the part of CVS’s business that processes prescription claims. Known by the name Caremark, it’s distinct from CVS’s pharmacy operations in that the former is the term of art for the high-volume operator that deals directly with drug manufacturers, setting prices, handling mail orders, etc. In other words, all the intangible administrative stuff that seems to define advanced economies in the early 21st century.
Finally, CVS’s specialty department handles the high-end, complex, life-sustaining and prohibitively expensive drugs that operate on low volume but gigantic prices. For every 1,000 patients who need a commonplace Paxil or Xanax prescription, there are one or two who require a $6,000 vial of Soliris to stimulate the creation of red blood cells and keep themselves alive. Because such drugs are so rare, costly, and specialized, they necessitate a CVS department unto themselves. And a lucrative one — revenues from specialty prescriptions were $50 billion in 2016. Subdivisions of CVS’s specialty business include Accordant, which offers an insurance-paid care program to patients who suffer from any of 17 specific serious conditions (e.g. hemophilia, cystic fibrosis); Coram, whose nurses will come to your house and infuse your veins to help treat hemophilia, chronic congestive heart failure, etc.; and Novologix, which makes and maintains claims software. Almost 5 million people a day patronize CVS stores, and Coram serves a relative paucity of 165,000 patients annually. (For related reading, see:
How Merck Found its Way Into Millions of Medicine Cabinets.)
CVS earns so much revenue from so many sources that it can remove high-margin item like tobacco from its stores, a measure undertaken strictly for public relations, and suffer no lasting damage. Besides, idealism only goes so far before butting heads with pragmatism. The company has not announced any plans to stop selling beer and wine. The official position of CVS management thus seems to be that livers are more dispensable than lungs, even though you have one of the former and two of the latter. (For related reading, see:
How Gilead Sciences Became a Big Name in Biotech.)
The Bottom Line
Americans allegedly love freedom, guns and football, but the true national pastime is consuming pharmaceuticals. Everything from anxiety to restless legs syndrome now has a corresponding pill or injection to alleviate or eradicate the symptoms, and it’s companies such as CVS that are the forefront of getting those drugs into users’ bloodstreams. With the number of medical conditions being newly identified consistently outpacing those being eradicated (just smallpox, and hopefully polio soon enough), the amount of money spent on pharmaceuticals will likely only increase. A development that should be resonant music to CVS shareholders.
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How CVS Makes its Money | Investopedia https://www.investopedia.com/articles/markets/012315/how-cvs-makes-its-money.asp#ixzz50G98EEm8
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