CVS Health Grows on Pharmacy Services, Retail Remains a Drag

On Jan 12, we issued an updated research report on CVS Health CVS. The company carries a Zacks Rank #3 (Hold).

This leading provider of integrated services across the entire spectrum of pharmacy care has been outperforming the broader industry over the past six months. The stock has inched up 0.7% against the industry’s 2.9% decline.

 

We are upbeat about the company’s strong Pharmacy Services business, which has been growing on a solid Specialty Pharmacy subsegment. Management stated that the company’s specialty business is its top priority in gaining new customers and retaining the old, loyal ones. Accordingly, CVS Health is poised to capitalize on this opportunity on the back of wide and differentiated offerings including Specialty Connect.

Management expects drug price inflation, product launches, higher utilization and new PBM clients to fuel growth. We expect the Pharmacy Services segment to be a stable growth platform.

We are also impressed with CVS Health’s robust PBM (Pharmacy Benefit Management) selling season, showing a solid progress from the last quarter. While gross new business totaled $6 billion, net new business reached $2.3 billion. These figures take into account the FEP (Federal Employee Program) specialty contract loss but exclude the impact from individual Medicare Part D program. The company has already completed about 90% of client renewals for 2018.

Additionally, it is encouraging to make a note of the company’s latest announcement to buy all outstanding shares of a diversified health care benefits company — Aetna (AET) — in a cash and stock deal worth approximately $207 per share or almost $69 billion (considering a rough estimate of Aetna's debt, the total transaction value is projected at $77 billion).

The company expects this takeover to be completed in the second half of 2018, subject to approval by the company’s shareholders, regulatory bodies as well as fulfillment of certain other customary closing conditions. On the deal’s successful closure, CVS Health estimates $750 million of near-term synergies with low to mid-single digit accretion in the second year post the transaction’s completion.

Additionally, the company has a strong cash balance allowing it to carry out share repurchases.

On the flip side, the company’s highly competitive retail pharmacy business is a big concern. Precisely, the company faces some stiff competition in the pharmacy segment. This is because availability of low-cost pharmacy options and other retail businesses continue to add pharmacy departments in the portfolio. Particularly, discount retailers have made substantial inroads in gaining a major market share. Moreover, CVS Health has delivered sluggish numbers within the retail Long Term Care business in the recent past. Per the company, this decision to restrict itself from participating in the TRICARE network and many fully-insured prime networks was due to the negative impact on Pharmacy sales and script comps.

Key Picks

Some better-ranked stocks in the broader medical space are Bio-Rad Laboratories BIO, Centene Corporation CNC and Molina Healthcare Inc. MOH, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bio-Rad has a whopping expected growth rate of 141.5% for the first quarter of 2018. The stock has jumped 35%, surpassing the broader industry over a year.

Centene has an expected long-term growth rate of 14%. The stock’s performance on the bourses has been solid in a year’s time with a high return of 70.4%.

For 2018, Molina Healthcare has a robust projected growth rate of 178.6%. In the last three months, the stock has surged 37.8%, higher than the broader industry’s rally of 17.9%.

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