CVS Health Banks On Solid Pharmacy Services, Competition Rife

On Dec 11, we issued an updated research report on CVS Health (NYSE: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 industryover the past six months. The stock has lost 10.6% compared with the industry’s 12.5% decline.

We are upbeat about the company’s strong Pharmacy Services business which has been gaining on strength in Specialty Pharmacy. Management stated that the company’s specialty business is top priority for customers. Accordingly, CVS Health is poised to capitalize on this opportunity on the back of wide and differentiated offerings, which include 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, with solid progress in the last reported quarter. While gross new business totaled $6 billion, net new business reached $2.3 billion. These figures take into account the loss of the FEP (Federal Employee Program) specialty contract but exclude the impact from individual Medicare Part D program. The company has already completed about 90% of client renewals for 2018.

We are encouraged by the company’s latest announcement to buy all outstanding shares of a diversified health care benefits company — Aetna (NYSE: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 the takeover to close 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 completion, CVS Health expects $750 million of near-term synergies, with low to mid-single digit accretion in the second year post the transaction’s closure.

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

On the flip side, the highly competitive retail pharmacy business is a concern. Precisely, the company faces stiff competition in the pharmacy segment. This is because availability of low-cost pharmacy options and other retail businesses continue to add pharmacy departments. Discount retailers, in particular, have made substantial inroads in gaining market share. Moreover, CVS Health has delivered sluggish numbers within the retail Long Term Care business in recent past. Per the company, the 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

A few better-ranked medical stocks are PetMed Express, Inc. (NASDAQ:PETS) and Align Technology, Inc. (NASDAQ:ALGN) . Notably, PetMed and Align Technology sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed has a long-term expected earnings growth rate of 10%. The stock has rallied roughly 94.1% over a year.

Align Technology has a long-term expected earnings growth rate of 28.9%. The stock has gained 136.1% in a year.

Zacks Editor-in-Chief Goes "All In" on This Stock

Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.

Download it free >>