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Tickers in this Article: ESRX, CVS, WAG
Recently, we have reiterated our Neutral recommendation on CVS Caremark Corporation (CVS), which is supported by our target price of $49.00.

CVS' retail segment continues to perform strongly, contributing 53% of the company's overall revenues in the first quarter of fiscal 2012. The strength, which is evident from the higher same-store sales during the last-reported quarter benefited from market share gains following the termination of the contract between Express Scripts Holding Company (ESRX) and Walgreen Co. (WAG). The impasse between the two big players diverted many customers from Express Scripts to CVS, which led to a 9.8% growth in CVS' pharmacy same-store sales. CVS now anticipates a benefit of roughly 3 cents to 4 cents in the second quarter of 2012 from this non-renewal, which is encouraging.

The company's Pharmacy Services business is also doing well. The segment, which made up 47% of total revenue in the last quarter, has now improved performance for the fifth consecutive quarter. CVS has completed 25% of its contract renewals scheduled for 2013 (in line with normal trends), indicating that the business remains on track.

CVS has maintained a high retention rate (98% in the last-reported quarter) over the last few quarters and we expect it to maintain this trend going forward. For fiscal 2013, CVS estimates total contract renewals of $14.5 billion.

We are also positive about CVS' plans to focus on its key-growth areas, such as Universal American's PDP Businesses, Maintenance choice and Pharmacy Advisor programs and the rapidly-growing Specialty Pharmacy sector.

The company is also confident about margin expansion this year. One of the primary reasons we agree that this is possible is the huge potential of generic drugs. The amount of branded drugs expected to go off-patent in 2012 will be more than double that recorded in the past five years.

Moreover, benefits from the company's streamlining initiatives are expected to outweigh related costs in 2012.

However, although CVS has consistently posted encouraging results, the recent merger between Express Script and Medco has created more challenges for CVS in the Pharmacy Services segment. The deal combined two of the three largest U.S. drug benefit managers and created a dominant player in the Pharmacy benefit Management (PBM) space that will cover more than 150 million prescription drug consumers and 50% of the large employer market. Consequently, we expect competitive pressures to increase, as the merged entity is likely to become a major force in the market.

To get further clarity on this, we eagerly await CVS' second quarter fiscal 2012 earnings announcement, which is slated to release on August 6, 2012 before the market opens.

The stock carries a Zacks #3 Rank (short-term Hold rating).

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