CVS Health Rides High on PBM Strength, Impressive Show in Q2

On Aug 13, 2015, we issued an updated research report on CVS Health Corp. CVS – a pharmacy retail giant based in Rhode Island, which provides integrated offerings across the entire spectrum of pharmacy care.

CVS Health posted yet another solid quarter with earnings and revenues exceeding the respective Zacks Consensus Estimate by decent margins. The company’s exit from the tobacco business positively impacted Retail Pharmacy business sales during the second quarter of 2015.

Despite facing tough pricing competition, CVS Health continues to gain from strong PBM selling season reflecting high levels of service and execution, competitive pricing and a unique integrated model that allows the company to provide differentiated products and services that generate savings, better health outcomes and convenience.

Gross new business win for 2016, pegged at $12 billion, is spread across all client segments while net new business stands at $11 billion. To date, the company has completed nearly 60% of client renewals for 2016 and has already seen strong retention.

Meanwhile, the soaring demand for specialty pharmacy, especially in the ongoing decade, is likely to accelerate growth for the company. Specialty revenues retain a strong growth trajectory (up 28.4% in the reported quarter), driven by volume, new products, inflation and the impact of Specialty Connect. Although this rate was less than the recent quarters, it had more than doubled compared to the market growth rates. We are also looking forward to the company’s newly developed comprehensive set of programs to effectively manage specialty trends.

Moreover, we are optimistic about domestic demographic trends, which are expected to drive utilization rates further as the population ages. This will facilitate retail pharmacy operators like CVS Health to grow and capture increased market share in the days ahead.

However, generic introductions and implementation of Specialty Connect impacted retail sales by 370 bps and 80 bps respectively. Additionally, a highly competitive market provides stiff challenges to CVS Health. Also, the sluggish economic conditions in the U.S. might hamper the company’s profit margin.

The stock currently has a Zacks Rank #3 (Hold).

Key Picks from the Sector

Retail-drug stocks such as Walgreens Boots Alliance, Inc. WBA, Herbalife Ltd. HLF and Diplomat Pharmacy, Inc. DPLO are worth a look. All the three stocks carry a Zacks Rank #2 (Buy).

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