How CVS makes its money

The death of bricks and mortar retail may grab the headlines, but despite the Amazon effect, some companies are still thriving. Even as Amazon’s entry into the retail pharmacy business becomes real, CVS Health is not just looking to survive, but to grow. In May 2018, CVS made progress on its $69 billion acquisition of Aetna Inc., an American health insurance company. In June 2018, millions of dollars worth of shares were reportedly purchased from companies such as Personal Resources Investment & Strategic Management Inc. with 23,629 shares, CapWealth Advisors LLC with 23,629 shares and Sentry Investments Corp. with 153,800 shares—according to the latest SEC filings.

Shares of both CVS Health and Aetna rose on July 11, 2018, following a report that the Justice Department would not challenge their merger. Bloomberg first reported the news, citing trade publication Reorg Research.

On August 8, 2018, CVS reported a second quarter profit with net revenue of $46.7 billion, up 2.2% from the same quarter last year.

A bit of history

CVS Health Corp (CVS) (originally Consumer Value Stores) can trace its origins to 1963, a value store founded by brothers Stanley and Sidney Goldstein and partner Ralph Hoagland. The company did well and grew over the next several years until it was acquired by the Melville Corporation, a general merchandise retailer, in 1969. By the mid-1990s, the corporation, now known as CVS, had sold off all but its profitable units pharmacy operations. Shortly after, it began to acquire competing chains – Eckerd, Osco, Sav-On and Longs. Today, CVS has over 9,900 retail locations operating in 49 US states, Washington and Puerto Rico. The company employs over 300,000 people.

For accounting purposes, CVS maintains four business divisions. In descending order of size, these are Pharmacy, Retail, Health Benefits and Corporate/Other. According to the company’s statement, at the end of 2021, revenues amounted to $ 292 billion.

Recipes and more

CVS’s pharmacy division is responsible for more than 67% of revenue. The term “pharmacy” in this context is a bit misleading and this particular sector of the business should probably be framed as “retail”. It includes not only dispensing prescriptions and administering flu shots, but also all the conveniences/other sales normally associated with pharmacy visits; everything from candies and cookies to As Seen on TV novelties like Snuggies and Slap Chops.

CVS’s medical clinic operations, called “MinuteClinic,” include 1,100 retail clinics in 33 states. CVS entered this industry relatively late, but has already become a market leader.

Benefits Management

Pharmacy Benefit Management is the part of CVS’s business that processes prescription claims. Known as Caremark, it differs from CVS’s pharmacy operations in that the former is a high-volume operator that deals directly with drug manufacturers, sets prices, handles mail order and more. In other words, all the administrative intangibles that seem to define advanced economies in the early 21st century.

Finally, the specialty division of CVS deals in high-quality, complex, life-sustaining and expensive drugs that work in small volume but at gigantic prices. For every 1,000 patients who need a simple prescription for Paxil or Xanax, there are one or two who need a $6,000 vial of Soliris to stimulate the creation of red blood cells and keep them alive. Because such drugs are so rare, expensive and specialized, they need a CVS department. CVS’ specialty business units include Accordant, which offers an insurance-paid care program for patients who suffer from any of 17 specific serious conditions (eg, hemophilia, cystic fibrosis); Coram, whose nurses will come to your house and inject into your veins to help treat hemophilia, chronic congestive heart failure, etc.; and Novologix, which makes and maintains claims software. Almost five million people a day visit CVS stores, and Coram serves more than 45,000 patients each month.

CVS earns so much revenue from so many sources that it can remove a high-margin item like tobacco from its stores, a measure taken at least primarily for public relations, and suffer no lasting damage. It is true that idealism only goes so far before it butts heads with pragmatism. The company has not announced any plans to stop selling beer and wine.

The bottom row

Everything from anxiety to restless legs syndrome now has a corresponding pill or injection to relieve or eliminate symptoms, and companies like CVS are at the forefront of bringing these medications to consumers. As the number of newly discovered medical conditions steadily outpaces those being eradicated, the amount of money spent on pharmaceuticals is likely to increase – a development that should be resonant music for CVS shareholders.

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