(CVS) CVS Caremark Corporation Ordered by FTC to Settle Claims

Recently CVS Caremark Corporation (CVS) was asked by the Federal Trade Commission (FTC) to pay $5 million to settle all claims related to the company’s misrepresentation of prices of certain Medicare Part D prescription drugs at CVS Caremark and Walgreen (WAG)  pharmacies.

The FTC alleged that from 2007 through November 2008, CVS Caremark’s subsidiary RxAmerica posted wrong prices on its website for prescription drugs including medications to treat epilepsy and symptoms of breast cancer. It also provided incorrect prices for posting to Plan Finder and third-party websites. The cases were extremely misleading for several seniors and disabled customers as the posted prices were 10 times below the actual prices of the drugs.

This fake interpretation encouraged patients to opt for RxAmerica’s plans, which later pushed them into the “doughnut hole” status where none of the drug costs were reimbursed. As a result, these senior Americans ended up paying a significantly higher-than-expected amount for their drugs. The $5 million penalty charge, as a cost of settlement of this prescription drug case, will be given to the consumers to compensate the loss they faced while paying for their medications. CVS Caremark had acquired RXAmerica, a subsidiary of Longs Drug Stores Corporation in October 2008.

Rhode Island-based CVS Caremark is a combination of a Pharmacy Benefit Manager (PBM) as well as retail drug chain. In terms of contractual arrangements with large plan sponsors, CVS Caremark holds a leading position in the industry. Currently, CVS Caremark is ranked among the top three PBMs in the US. The other big players in this field are Express Scripts (ESRX) and Medco Health Solutions (MHS). Together, these three companies control roughly 50% of the market by covering approximately 240 million prescription drug consumers annually.

However, CVS Caremark’s Pharmacy Services business has been witnessing significant challenges over the past several quarters due to the general macroeconomic turmoil and the recent debt crisis, which adversely impacted consumer purchasing power. Further,  the upcoming merger between Express Script and Medco will consolidate the industry resulting in the creation of a leader which potentially will hold over one-third of the market.

Currently, CVS Caremark, Express Scripts, and Medco are serving large plan sponsors. Given their size and potential to offer exclusive contracts, over 40 of the “Fortune 50” largest corporations depend on these three top shots for PBM services. However, post the Express Scripts-Medco merger, in terms of covered lives, we anticipate CVS Caremark to significantly lag the merged entity’s reach.

CVS Caremark currently retains a Zacks #2 Rank (short-term Buy rating). However, over the long term, we are Neutral on the stock, at par with Medco, Express Script and Walgreen.

CVS CAREMARK CP (CVS): Free Stock Analysis Report

EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report

MEDCO HLTH SOL (MHS): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

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